secondary data review on the food security situation in the kyrgyz ...

SECONDARY DATA REVIEW ON THE FOOD SECURITY SITUATION INTHE KYRGYZ REPUBLICAgnès Dhur, Food Security Analysis Service, World Food ProgrammeSummary of the <strong>secondary</strong> <strong>review</strong> in relation to food security ........................................ iiI- Geography........................................................................................................................ 1II - Demography and society............................................................................................... 2Demography ..................................................................................................................... 2Society.............................................................................................................................. 2III - History and political administration ............................................................................. 3IV- Agriculture and food supply.......................................................................................... 4Agro-ecological zones ....................................................................................................... 4Contribution of agriculture to food supplies and growth...................................................... 5Crop production during the 2007/08 season ...................................................................... 9Livestock......................................................................................................................... 10Forestry .......................................................................................................................... 11Agricultural perspectives ................................................................................................. 12V - Food markets ............................................................................................................... 13Market integration ........................................................................................................... 14VI - Economic situation and poverty ................................................................................ 16Macro-economy .............................................................................................................. 16Poverty ........................................................................................................................... 18Characteristics of the poor............................................................................................... 20Labour markets ............................................................................................................... 23Migrants and remittances ................................................................................................ 25Urban areas and poverty................................................................................................. 28Gender labour issues ...................................................................................................... 29Access to financial services............................................................................................. 30Bazaars contribution to economy..................................................................................... 31VII - Social safety nets and support system..................................................................... 32The Unified Monthly Benefit (UMB) ................................................................................. 33Monthly Social Benefit (MSB).......................................................................................... 36Privileges ........................................................................................................................ 36Socially protected prices ................................................................................................. 37Housing subsidies........................................................................................................... 37Old person homes and social services ............................................................................ 37Conclusions on the Government’s social safety net programmes..................................... 37VIII - Food consumption and food expenditures.............................................................. 39IX- Health, nutrition, electricity, water and sanitation...................................................... 42Nutrition .......................................................................................................................... 42Health ............................................................................................................................. 47Water, sanitation, electricity............................................................................................. 48X - Education ..................................................................................................................... 49XI - High food prices, forecasted evolution and responses ............................................ 51High food prices macro-economic situation and forecasted evolution............................... 51Micro-economic effects of high food prices: food access.................................................. 54Short-term responses to high food prices ........................................................................ 55XII - Longer-term responses to high food and fuel prices and poverty .......................... 58Longer-term economic perspectives ................................................................................ 58i

Summary of the <strong>secondary</strong> <strong>review</strong> in relation to food securityKyrgyzstan is a small landlocked country, predominantly mountainous, with an estimatedpopulation of 5.2 million people. There is clear divide between the north and south of thecountry. Fertile crop areas are limited to valleys and mostly located in the south (particularlythe Ferghana Valley). Industries are rather found in the north, where the population presentsbetter economic and social indicators than the rest of the country. The country is prone toseveral natural disasters, including earthquakes which have occurred at the end of 2007 andin October 2008.Food availabilityAgriculture is the main source of livelihoods of about 2/3rds of the population and continues tocontribute to a significant share of the country’s Gross Development Product (34%). Cropproduction, in the southern valley mostly, is dominated by grains (wheat for humanconsumption and maize and barley for animal feed), but potatoes and vegetables are alsowidely produced. Livestock raising is concentrated in the highlands. Agriculture issubsistence-oriented, with most of the produce being consumed at household level andlimited marketing. Although yields are low due to lack of improved seeds and high cost offertilizer and pesticides, the country is practically self-sufficient in potatoes, vegetables, meatand dairy products. However, it must import at least half of its wheat requirements, as well asvegetable oil and sugar.The area under cultivation increased by almost 3% in 2007/08, as producers were probablyencouraged by high food prices. However, poor climatic conditions have adversely affectedthe harvests of wheat and vegetables. Import requirements for the 2007/08 season have beenestimated at between 300,000 and 475,000 tons (depending on the source of information).The government is able to meet import requirements commercially without requiring externalfood aid. However, the rise of international food prices, and particularly the higher cost ofwheat from Kazakhstan and of transportation will increase the foreign trade deficit.Food accessKyrgyzstan is a ‘low income country’ and second poorest ex-Soviet republic after Tajikistan.Although impressive progress were made on poverty reduction since the 1990s, owing mainlyto a stimulation of private consumption supported by remittances sent by migrants in Russiaand Kazakhstan, more than 1/3 rd of the population was considered poor and 7%extremely poor in 2007. Poverty is concentrated in rural areas (42% poor and 8% extremelypoor) and in <strong>secondary</strong> towns, while Bishkek and the northern region of Chui present thelowest poverty rates.Poverty is clearly associated with rural locations, large families, low level of education,unemployment, and limited access to infrastructure and improved water and sanitationfacilities. Remittances sent by migrants greatly contribute to alleviate poverty but benefit only16% of households. The Government implements a social assistance programme comprisinga variety of components (pensions, allowances, subsidies in cash and in-kind) and targetingdifferent groups of the population on the basis of their estimated income as well as personalcharacteristics (e.g. orphans, veterans, etc.). While this assistance as a whole covers abouthalf of the population, it presents a large exclusion error and the value of the benefitstransferred is very low.The rise of food and fuel prices since 2007 has provoked a peak of inflation, which hasreached 32% in June 2008. Producer prices and wages have also risen, but generally lessthan the food and fuel prices, thus resulting in a loss of purchasing power for most of thepopulation. Almost one out of 5 persons is considered to be both poor and net food consumerand thus most affected by the price increase. Urban citizens are expected to be most affected,given their high reliance on markets and cash income. However, the widespread practice ofbarter, particularly in rural areas, and limited knowledge of the coping mechanisms andcapacities of the population, make it difficult to estimate the impact of the high prices on thefood access and food consumption of the population.ii

Food consumption, nutritional status and utilizationAt national level, the average per capita food intake was estimated at 2,220 kilocalories percapita per day in 2007, just above the “standard” requirement of 2,100 kcal. However, it hasdecreased in 2007 compared to 2006 (2,270 kcal), and is also much lower among thepoorest groups of the population (1,560 kcal and 1,870 kcal for the 1 st and 2 nd poorestquintiles respectively).Low diet diversity and in some cases limited amounts of food, particularly of good qualityprotein and micro-nutrient rich food, affects especially children and contribute to the higherrates of stunting observed among those living in poor households. Chronic malnutrition,while relatively low compared to other poor countries, affects almost 19% of under-5 childrenin the poorest quintile, compared to 10% in the wealthiest quintile. However, unsatisfactorychild feeding practices are also contributing to child malnutrition. Deficiencies in iron,vitamin A and iodine also reflect poor diet diversity and are associated with stunting.More than a quarter of the population does not have access to improved water sourcesand 40% do not have access to improved sanitation. The situation is worse in rural areas.The quality of health care has deteriorated due to the degradation of infrastructures and lackof public spending on equipment. Health access has also decreased especially for the poorwho cannot afford the cost of drugs and ad hoc payments to health agents. The health andnutritional status of children are also correlated with maternal education levels. As the qualityand economic access to education has deteriorated for similar reasons as for health services,the improvements made over the past years on nutritional and health indicators areexpected to slow down, if not reverse back to poorer levels of the past.Perspectives on the food security situation and responses1) On the short-termThe government is expected to meet its import requirements – wheat, vegetable oil, sugar –with the financial support of international financing institutions (e.g. World Bank). Somedonors (e.g. USAID) have also pledged support with wheat seeds for the next planting season.The government has also taken measures to build up a State grain reserves, establish a 90-day food stock of 8 commodities, purchase wheat from domestic producers, subsidize dieselfor spring ploughing and fertilizer, decrease the Value Added Tax on a number of produce,and authorise easy term loans. However, the extent to which these measures will be actuallyimplemented, and how fast, remains uncertain.Some social benefits have already been increased (e.g. pensions) and the World Bank andthe European Commission have prepared projects to top-up the benefits provided by one ofthe major social assistance programme of the government. Nutritional support targeted tovulnerable groups (children, pregnant and lactating mothers) as well as agricultural support isalso envisaged under the World Bank project. Other responses that could be consideredinclude targeted food stamps and further VAT reductions on key food items.2) On the longer-termStructural measures to improve agricultural productivity (infrastructures, markets, credit,education) and investments (regulatory environment, transaction costs) are required. Therecent increased integration of Kyrgyzstan into the Central Asian region economy should besupported through better regulations and fiscal mechanisms.The social safety net should also be improved to increase coverage and decrease leakagesto the non-poor. Conditional cash transfers can also be envisaged to encourage and facilitatethe use of health and education services.iii

I- Geography Small, double land-locked country – Kyrgyzstan borders China to the east, Kazakhstan tothe north, Uzbekistan to the west and Tajikistan to the south-west. Capital and largest city (in the north): Bishkek – Next most important town: Osh (in thesouth). Area: 191,000 sq. m, about half the size of Sweden Climate: cold winters and hot, dry summers The Kyrgyz Republic is mountainous with most regions at least moderately mountainous,the exception being Bishkek and Chui. Nearly 90% of the total territory lies in altitudes of1,500 m above the sea level, and more than 40% lies above 3,000 m. This featureincreases the cost of delivery of social services and infrastructure, which means that theseservices are not delivered to many and the population’s welfare is adversely affected. The north and the south of the country are connected only by high mountain road, whichcan be cut in case of disaster. Railway transport between the north and the south requirescrossing Uzbekistan and Kazakhstan. Roads are the main means of transport, accountingfor 60% of freight-haulage and 80% of passenger transport 1 . The country is at high risk of natural disasters: mudflows, floods, landslides, earthquakes(the latest ones being in December 2007 and October 2008) and avalanches. According tothe Ministry of Emergency Situations, nearly 90% of all disasters occur in the south in theFerghana Valley oblasts of Osh, Jalal-Abad and Batken. There are between 200 and 300hazard events every year, mostly seasonal in nature.Main hazards and areas at riskHazardAreas at riskEarthquake Bishkek, Ferghana Valley South of Osh city (Kara-Suisky district)Landslides Osh oblast (Alay, Uzgen, Pakhtabad, Malay-Suu, Jala-Kuduk districts) Batken oblast (Batken district)Floods Jalal-Abad oblast (Chatkal district) Osh oblast (Uzgen, Pakhtabad, Malay-Suu, Jala-Kuduk districts)Water contamination Osh oblast (Mayluu-Suu district) Bishkek-Osh highwayAvalanches Bishkek-Naryn highway Osh oblast (Kara-Kulja district) Bishkek cityCivil unrest Issyk-Kul oblast Ferghana Valley (Osh, Jalal-Abad, Batken oblasts)Poverty, Livelihood Vulnerability and Food Insecurity in the Kyrgyz Republic – M. Abi Samra, WorldFood Programme, March 2007 (unpublished) Kyrgyzstan also has a combination of technological disasters due to the proliferation ofindustrial sites in disuse and/or not properly maintained or environmentally safe. Unstableuranium tailings pose a serious risk and can affect the whole Ferghana Valley. Risks and conditions of Kyrgyzstan are also observed in neighbouring Tajikistan andUzbekistan, especially in the Ferghana Valley area. It is thus necessary to foster subregionalcooperation in disaster preparedness and prevention.1 World Bank, quoted in “Kyrgyz Republic Country Report – The Economist Intelligence Unit, 2008”1

II - Demography and societyDemography Estimated population in 2007: 5.3 million persons 2 Average annual population growth: 0.9% The population is young. About 30% of the population is under 15 years old and morethan 40% below 20 years. This proportion is close to that of Uzbekistan and lower thanTajikistan (about 40%) but higher than Kazakhstan (about 24%). Due to topographic conditions, the majority of the population is concentrated in the south ofthe country. More than half of the population lives in the densely populated FerghanaValley.Population (2005) % total population Density (inhabitants/km2)Total country 5.2 million 100% 26Bishkek city 798,000 15% 76Chui oblast 752,300 15% ?Issyk-Kul oblast 428,500 8% 10Talas oblast 213,600 4% 19Naryn oblast 267,000 5% 6Batken oblast 418,100 8% 25Jalal-Abad oblast 960,800 19% 28Osh oblast 1,299,600 25% 44National Statistics Committee 2006, quoted in “Poverty, Livelihood Vulnerability and Food Insecurity inthe Kyrgyz Republic – M. Abi Samra, World Food Programme, March 2007” (unpublished) About 37% of the population is urban (2007). This value is similar to that of Uzbekistanand higher than Tajikistan (about 25%) but lower than Kazakhstan (about 55%). Kyrgyzstan Human Development Index is ranked 116 out of 177 countries, and 56 inthe World Bank Wealth Ranking table (compared to 40 for Tajikistan, 60 for Uzbekistan, 84for Turkmenistan and 92 – highest- for Kazakhstan). Life expectancy at birth: 63 years for males, 72 years for females.Society Some 65% are ethnic Kyrgyz, 14% Uzbeks (in the fertile Ferghana Valley in the south) and13% Russian (in the north). Tensions exist between Kyrgyz and Uzbeks, as well asbetween residents of the more traditional south and the Russian-oriented north. Clashesoccur periodically between the Kyrgyz and the Tajiks along the border with Tajikistan overwater resources. Generally speaking, the north is wealthier and more industrial in nature, while the south ispoorer and more agrarian. The northern population tends to gravitate more towardsKazakhstan and to a lesser extent towards Russia, while the south with its sizable Uzbekminority (majority in some areas), gravitates towards Uzbekistan. Poverty and unequal distribution of resources (particularly land and water) between variousethnic groups in rural areas can spark tensions. The Ferghana Valley, the most fertile anddensely populated area in Central Asia, has been described as “the most explosive regionof Central Asia” because of its mixed population of Uzbek and Kyrgyz, and because of thehigh rates of poverty and unemployment 3 . It crosses Kyrgyzstan, Uzbekistan and Tajikistan. However, it seems that the greatest threat to political stability remains public discontent withthe economy (see Section XII). The Kyrgyz are traditionally Islamic; 80% of the population practices at least some SunniMuslim traditions. Islam’s influence is heavier in the south.2 UN Department of Economic and Social Affairs (DESA) Population Division (2006)3 Poverty, Livelihood Vulnerability and Food Insecurity in the Kyrgyz Republic – M. Abi Samra, WorldFood Programme, March 2007 (unpublished)2

Administratively, the country is organized in 7 provinces (oblast) and the capital Bishkek.The provinces are further divided into districts (rayon) including, besides the district’s centre,towns and municipalities (ail okmot). These municipalities typically comprise several villagesand hamlets. On the local level, there are usually informal as well as legal formal institutionssuch as village heads, elders’ councils and courts, and women’s and youth councils,concerned with customary and written laws, local social problems and conflicts. In 2004, the Government took measures to improve the employment terms of staff of localself-governance bodies, salaries of heads of ail okmot were increased by 2 times, and ofother specialists of the sector by 30% 4 . Social, political and business networks are structured along extended family lines. Eachfamily or clan provides support. Society is community-oriented 5 . There is a tradition ofmutual help through charity and natural crediting (cattle, seeds etc.) and assistance relatedto entrepreneurship and support of the needy has widely developed. Local Stateadministrations and communities in many regions set up extra-budgetary saving funds toaddress specific social problems 6 . Intense efforts of social mobilization also took place and as of 2003, there were anestimated 6,000 jaamats, 3,500 self-help groups and 4,400 community organizations. The extended family has great importance in Kyrgyz culture and several generations maylive together in one household. This is less true in urban areas, where nuclear familyhouseholds are common. A study conducted in 2001 revealed that the non-poor, especially in urban areas, aremoving away from relationships based on ascriptive relationships to more ‘modern’,interest-based networks, which they successfully exploit to access an expanding array ofresources. By contrast, the shrinking networks of the poor have reduced their access todecent health care, good education and timely social assistance, services that areincreasingly mediated by personal “connections” 7 . The youngest son is responsible for the welfare of his aging parents. When he marries, heand his new bride live with his parents for at least 6 months. A Kyrgyz man is regarding as the financial provider and undisputed head of the family,especially in rural areas. The most common form of housing in urban areas is the Soviet-era apartment building.Freestanding homes are typical in towns and rural areas. Many people live in compounds inwhich extended family members also have houses. Some Kyrgyz live in a yurta (roundnomadic tent) while tending their animals in summer pastures. People travel by private truck or car but few own cars. Most ride public buses in andbetween cities. Villagers also continue to ride horses or use horse-drawn carts. 41% of the population have mobile phones and 14% of the population are Internet users.III - History and political administration The country exists as an independent republic since the break down of the Union ofSocialist Soviet Republics in 1991. It joined the Community of Independent States (CIS) inDecember 1991. The break has left 3 Kyrgyz enclaves outside of the existing borders (2 in Uzbekistan and1 in Tajikistan) around which serious disputes still prevail and warrant attention.4 Kyrgyz Republic: Poverty Reduction Strategy Paper Progress Report – International Monetary FundCountry Report No.04/200, July 20045 Kyrgyzstan – CultureGrams World Edition, 20096 Kyrgyz Republic: Poverty Reduction Strategy Paper Progress Report – International Monetary FundCountry Report No.04/200, July 20047 The Context for Community Driven Development in Central Asia: Local Institutions and Social Capitalin Kyrgyz Republic, Tajikistan and Uzbekistan – The World Bank, July 20023

The country has gone through a difficult phase of economic, social and political transition. The nation’s first president, Askar Akayev, won three successive elections amid allegationsof corruption and the suppression of dissent. In February 2005, independent and oppositioncandidates were barred from running in parliamentary elections, sparkling demonstrations.A new president, Kurmanbek Bakiyev, was elected in 2005. His party dominated electionsin December 2007. Based on the Economist Intelligence Unit’s 2008 democracy index, Kyrgyzstan ranks 114 thout of 167 countries. It scores poorly in terms of “government functioning”, due to pervasivecorruption as well as public mistrust of the Government and State officials. This stems fromrecent, more restrictive laws governing the media and the right to hold demonstrations. There is a perception of pervasive nepotism and regionalism that raises questions about thecapacity of the administration to tackle high-level corruption in practice, with potentiallynegative implications for the country’s economic prospects. Progress on achieving the Millennium Development Goals (MDGs) shows mixed results,with not all indicators showing improvement 8 . A few indicators have deteriorated over thelast 15 years, such as women’s employment in non-agriculture activities and primary and<strong>secondary</strong> school enrolment rates. On the other hand, mortality indicators for children andadults have improved, although life expectancy remained at 68 years since 1990.IV- Agriculture and food supply Much of the country consists of high-altitude steppe that is used mainly for livestock grazing.Grain production is concentrated in the lower valleys. In general, the necessary conditions exist for the cultivation of a wide range of product andto reach productivity equal to Europe. The country’s cropland per person is roughly equal tothe European average, despite the fact that only 6.5% of total land is arable. Most of thecropland is irrigated, further south and enjoys a milder climate than much of Europe. Wheat is by far the most important crop grown, generally using between half and 2/3 rd of allcultivated land. Near 40% of the wheat are cultivated in summer and 60% in winter.Potatoes are the second most important crop. Thanks to its mountains, Kyrgyzstan is rich in water resources. Between 40-70% of wintercrops are cultivated in irrigated conditions 9 . The Ferghana Valley, crossing over Kyrgyzstan,Uzbekistan and Tajikistan, is the most fertile and most densely populated region of thewhole Central Asia.Agro-ecological zones5 main zones according to FAO: Chui Region I, Chui Region II, Naryn Region, Issyk-KulRegionChui Region I Chui Region II Naryn Region Uzgen RegionIssyk-KulRegionAverage 500 m 800 m 1100 m 1100 m 1800 maltitudeAverageannualrainfallTotal areaarable landPotentialwheat yieldproduction160-350 mm 400 mm 550 mm 550 mm 160-180 mm40 ha 300,000,including50,000 irrigated12 t/ha 5.8 t/ha dry landfarming7.6 t/ha907, including897 irrigated907, including897 irrigated10 t/ha 3.8 t/ha dryland farming5 t/ha irrigated2266 ha7 t/ha8 Kyrgyz Republic Poverty Assessment. Volume I: Growth, Employment and Poverty – World BankReport No.40864, September 20079 Crop Monitoring in Central Asia, April-May 2008 – MARS FOODSEC, European Commission JointResearch Center, 10 June 20084

Averagewheat yieldproductionAveragesowing dateAverageharvestingdateCroppingsystemRotationsChui Region I Chui Region II Naryn Region Uzgen Regionirrigated6 t/ha 3.6 t/ha dry landfarming4.8 t/hairrigated20 April- 10 20 October- 10MayNovember dryland farming10-30 October20 September-10 OctoberCommercialWheat in 2 ndplaceMaizeSugar beetPerenniallegumesirrigated25 July – 1AugustCommercial forirrigatedDry landfarming: fallowgrain-barley.Wheat is maincultureIrrigated:perennials,sugar beet orcotton, wheat6 t/ha 3 t/ha dry landfarming4.2 t/hairrigated20 April- 1May20 September-1 October20 October- 20November1 July- 5August dryland farming10 July- 1AugustirrigatedIssyk-KulRegion3 t/haWinter: 20 to30 SeptemberSpring: 10 to20 April20-30SeptemberCommercial Commercial CommercialRotation:wheattobaccowheat-maize-WheatvegetablesDry landfarmingrotation:wheat- saflorwheatsunflowerwheat-saflorIrrigated:wheattobaccowheat-maizewheatvegetablesStandard 300kg/haStandard 300kg/haPerennials,wheat, barley,melonsSeedsStandard 25 Standard 200 Standard 25Standard 250kg/hakg/hakg/hakg/haNitrogen Standard 150 Standard 200 Standard 400-fertilizers kg/hakg/hakg/haPhosphorus Standard 200 200 kg/ha - - -andkg/hapotassiumfertilizersHerbicidesStandard 2 2 lit/ha - - -lit./haLabour 30 h/ha 35 h/ha - 105 h/ha -Contribution of agriculture to food supplies and growth During the Soviet era, the country was the main provider of high quality wool, cotton silk,tobacco, fruits, vegetables and mutton. The industrial decline after the break up of theformer Soviet Union was accompanied by an increase of agriculture in the livelihoods of thepopulation. Agriculture’s role as a ‘labour sink’ precipitated the migration of Kyrgyz workersfrom urban areas to village life, and led to numerous small-scale operations. Workersdecided that it was better to farm on a small peasant parcel, eating part of the output andselling the surplus, than to remain unemployed in urban areas. At present, about 2/3 rd ofthe population live in rural areas and most depend on agriculture for their livelihoods. Even in urban areas, part of the population depends on garden and field production for theirfood and part of their income. It is estimated that 1/3 rd of urban inhabitants are growingcrops of some variety. Although its share has declined since the mid-1990s, mainly owing to the start of largescalegold mining in the country, agriculture still accounted for 34% of GDP in 2007 (19%5

for services and 47% for industry). It employs an even larger share of the workforce, ofmore than 50% of the working population in 2000-05. Initially, the higher output per unit of land increased farm incomes enough to supportfamilies. Over time, the sector has become the country’s de facto welfare system. Manyhouseholds turn to farming as a social safety net, rather than a business 10 . Agriculture,which was previously partially oriented towards commercial production, has become largelyof a subsistence character, oriented towards the satisfaction of basic food needs of thehouseholds. Most of the crops produced are geared towards meeting the consumptionneeds of the producers (wheat, potatoes, vegetables) and do not reach the market. For thisreason, variations of agricultural production have significant impacts on households’ foodconsumption. Successful land reform policies converted agriculture into an engine for growth during thelate 1990s, leading to a robust economic expansion. The factors that contributed to risingoutputs included intensive farming (potatoes, bell peppers, berries) and rotation to highvaluecrops. Privatization resulted in most of the agricultural output to be produced by smallhousehold farms. However, even though land productivity rose as workers tilled their land more intensively,labour productivity fell as the addition of new farm workers eventually lowered themarginal product of labour. Labour productivity could be increased if the sector becamemore rationalized, but the typical Kyrgyz small-plot owners are unwilling to sell their plotsbecause they risk starvation and displacement without some other type of public safety net.These small peasant farmers are also reluctant to take risks with new crops, seeds orfertilizers, because the consequences of a single bad year are dire in the absence of accessto credit. Since 2001, growth in agriculture (as well as the overall economy) slowed since2001 and new problems began to arise, such as soil degradation and a diminishingmarginal product of labour. The agricultural sector comprises today 4 types of production units:1) the peasant farms (average area of 3 ha/farm),2) large enterprises (average area of 546 ha/farm),3) leased land units,4) household plot (korajai). The first three types are registered as ‘businesses’. The fourth type, household plot, withan average area of 0.1 ha/farm, is an unregistered source of most of the potatoes andvegetables, a modest proportion of grain and fodder, and about half of the livestockproducts. A number of NGOs and agencies are working with self-help groups and pre-cooperatives toimprove production, processing and marketing. The trends between 1990 and 2005 in terms of crops indicate that:o The area under wheat, potatoes, and sunflower has increased;o Fodder crops (e.g. corn, barley) have decreased but picked up in recent years;o Cultivation of export crops like tobacco, cotton and sugarbeet, has decreased, owinglargely to low purchasing prices and high price of inputs. The north of the country possesses 2/3 rd of the arable land (however, 60% of the ruralpopulation resides in the south, thus putting pressure on land). Wheat is grown in mostoblasts, with Chui and Issyk-Kul being the major producers. Potatoes are mainly producedin Issyk-Kul and Talas oblasts, while vegetables are grown mostly in the northern oblasts,principally Chui and Talas. Comparing 2007 with 2006, no decline of wheat yields was reported, while an increase inthe yields of sugar-beet and potatoes was apparent. Yields of the cash crops tobacco andcotton also seemed to have improved.10 Agriculture in Kyrgyzstan: Growth Engine or Safety Net? – M.K. Light, University of Colorado, October20076

Crops yields (100 kg/ha) 2000 2006 2007Wheat 23.4 20.7 20.0Sugar-beet 191.4 167.6 180.3Potatoes 151 152 157Vegetables 157 176 178Cotton 26.0 25.7 27.4Tobacco 23.8 24.0 24.7National Statistics Committee of Kyrgyzstan, update of 19 February 2008 Kyrgyzstan is self-sufficient in potatoes, most vegetables and fruits, milk products, meat(93%) and eggs but must import half or more of its wheat (more than 200,000 tonsannually), vegetable oil and sugar. Food aid has dropped to close to zero since 2003. Yields of rainfed wheat seemed poor (0.3-0.9 t/ha) compared to the 2.5-6.0 t/ha for theirrigated sub-sector. However, comparing 2007 with 2006, no decline of wheat yields isreported, while an increase in the yields of sugar-beet and potatoes is apparent. Yields ofthe cash crops tobacco and cotton also seem to have improved.Crops yields (100 kg/ha) 2000 2006 2007Wheat 23.4 20.7 20.0Sugar-beet 191.4 167.6 180.3Potatoes 151 152 157Vegetables 157 176 178Cotton 26.0 25.7 27.4Tobacco 23.8 24.0 24.7National Statistics Committee of Kyrgyzstan, update of 19 February 2008 Data from NCS indicate a decrease in the production of grains (wheat especially) andsugar-beet on State farms and farm cooperatives in 2007 compared to 2006, but anincrease in the production of potatoes and vegetables. At household level, the production ofwheat and sugar-beet also decreased between 2006 and 2007, but the production ofpotatoes remained similar, while the production of vegetables increased. The production ofcash crops including cotton and tobacco decreased in all types of units between 2006 and2007. The results confirm the growing share taken by farm cooperatives in total cropproduction, with a decline of the importance of State farms and relative decrease of theshare taken by household production units.Crop (Mt) Year State farms Farm cooperatives Households2000 294.3 760.6 107.5Wheat 2006 104.1 708.3 58.22007 78.3 624.0 34.22000 82.9 194.3 33.7Sugar-beet 2006 30.0 166.6 29.42007 14.8 118.2 22.42000 72.3 457.1 592.7Potatoes 2006 10.6 876.4 367.72007 13.1 991.6 369.12000 56.4 326.4 388.0Vegetables 2006 18.4 476.5 266.42007 20.6 489.5 279.72000 22.1 80.2 0Cotton 2006 11.5 105.7 0.302007 3.5 91.6 0.032000 5.5 15.9 5.5Tobacco 2006 0.8 11.9 0.72007 0.7 13.3 0.4National Statistics Committee of Kyrgyzstan, update of 19 February 20087

The national food balance situation did not change significantly between 2006 and 2007 interms of per capita availability of bread and bakery products, potatoes, vegetables, fruits,sugar, meat, dairy products, eggs and vegetable oil. Further agricultural growth would require increased labour productivity, either by adoptingbetter (and more costly) planting technology (high quality seed, fertilizer), or by increasingthe agriculture capital stock – both of which require investment. For the Kyrgyz farmer,higher productivity comes from investment in fertilizer, seeds, dairy cooling equipment,better breeding and vaccines. The 2005 Kyrgyz Integrated Household Survey showed that only 3% of rural householdsowned a tractor or any other agricultural equipment, while 9% of households owned a horse.The remarkably low capitalization confirms the small-scale/subsistence farming nature andlow commercialization of the agriculture. In the absence of such investment, the quality and quantity of Kyrgyz outputs is inferior,making Kyrgyz farmers uncompetitive on international markets, and forcing them to sell atthe local market price. Nevertheless, potatoes and vegetables contribute 12% to the valueof official exports 11 . Prices for some goods, such as cereals and grains, were found to be 50-80% higher inKyrgyz markets than on world markets. These high prices benefit larger scale farmers,mostly located near the Kazakh border. But the production technology does not apply forthe typical small-scale farmer, who has less than 1 ha of land. In addition, these higher prices do not necessarily raise income of Kyrgyz farmers.Incomplete and segmented markets provide arbitrage opportunities for traders, and despitegrowing competition in trading, there remains a large wedge between farm-gate prices andmarket prices across the country. Low revenues per worker are partly explained by the highratio of farm workers to land, and partly by low farm-gate prices for farm outputs. Low farm-gate prices are, in turn, an artefact of Kyrgyzstan’s geographic situation as a landlocked, mountainous country. For some goods, farmers face prices much lower than worldprices (e.g. export prices for wool are less than 1/3 rd of world prices for standard quality).But for many inputs, such as fertilizer, farmers face prices higher than the world price. An important market failure for agriculture is the lack of contract enforcement. Bothbusinesses and farmers reportedly do not honour agreements and breach contracts. As aresult, without knowing with certainty how much money will be earned after a growingseason, farmers cannot justify investments in fertilizer or seeds. Four factors reinforce a stable equilibrium in Kyrgyzstan as a rent-seeking society:1) Wage levels near poverty for civil servants: makes supplemental income essential forsurvival;2) Unstable political environment: leads to short-term outlook among politicians and theirsubordinates;3) Complicated regulatory structure, with numerous conflicting rules and by-laws:provides mid-level bureaucrats with justification for interference;4) Inconsistent level of penalties for non-compliance: making bribery an attractivealternative to paying fines. Rent-seeking state organizations lead to two distinct types: (i) very small, household-levelfarms which operate informally to avoid taxes and rent-seeking by the state; and (ii) largebusinesses which have the professional staff and resources to manage the rent-seekingstate in a cost-effective way. Most farmers (83%) are small-scale.11 Regional Market Survey for the Central Asia Region – World Food Programme, Draft, September20088

Crop production during the 2007/08 season 12 According to the National Statistics Committee (NCS), the total cropped area increasedby 2.8% in 2008 compared to 2007 13 . Total area sown on wheat (winter and spring) andbarley was estimated at 830,000 ha. During 2008, lack of water, hail storms, spring frost and locust infestation affected severalparts of the country and damaged the agricultural production. While the area sown towheat increased by over 30,000 ha, frost and a dry summer affected growth. Frost in Aprilalso caused damage to fruits, doffer and winter wheat crops in Chui and Talas oblasts, twomajor producing areas. The Ministry of Agriculture (MoA) estimated a combined spring and winter cereal harvest of1.502 million tons (including 0.784 tons of wheat). However, a WFP mission in August 2008estimated the harvest at 1.234 million tons (including 1.176 million tons of wheat). FAO forecasts the 2008 grain and pulse harvest at 1.5 million tons, 91% of the average2003-2007 and the second poor harvest in a row 14 . Based on an annual cereal per capita consumption of 250 kg wheat and 2.45 kg of rice, andaccounting for harvest losses and non-food uses, the cereal balance for 2008 calculated bythe WFP mission results in a requirement of 0.475 million tons of imports, including 0.469 ofwheat. The MoA’s estimates are of 0.575 million tons of wheat imports, while FAOestimates 0.300 million tons of wheat import requirements. Producer prices for wheat grain, milk and vegetables have increased over the periodJanuary-June 2008, compared to the same period of 2007. They have doubled for wheat,and increased by 1.4 times for milk and 1.3 for vegetables. On the other hand, potato priceshave decreased compared to 2007 (by about 30%) 15 . The food supply situation has been tense owing to high cereal prices and a ban onexports of wheat and vegetable oil from Kazakhstan during the final months of the 2007/08marketing year. However, the ban on wheat exports was lifted in September and accordingto FAO the country should not face difficulties in mobilizing its cereal import requirements.Given good harvests in Russia, Ukraine and Kazakhstan, and expectations for Kyrgyzstanitself, prices for wheat are expected to fall from the high levels of the summer. The World Bank and FAO have pledged US$4.45 million to purchase wheat (enough forabout 100,000 tons). For the next winter and next planting season, some of the main concerns are:o Poor wheat harvest in some areas has restricted the availability of wheat seeds.o Lack of hay and fodder for animals in areas when the drought in the spring of 2008affected pastures and crops.o High prices of fertilizer, rendering their already limited use all the more difficult.o Possible disruptions of irrigation due to the very low level of water in the mainreservoirs, particularly the Togtogul reservoir that covers 40% of the energy needs ofthe country. Daily electricity cuts have taken place in 2008 and are likely to increase in2009.o Electricity cuts may also affect the working schedules of wheat mills in remote areas,hence making it difficult for families to obtain flour.12 Regional Market Survey for the Central Asia Region – World Food Programme, Draft, September200813 Food Security Information Bulletin No.2/2008 – National Statistics Committee, Bishkek, 200814 FAO Global Information and Early Warning System (GIEWS), 17 September 200815 Food Security Information Bulletin of the Kyrgyz Republic, No.2/2008 – National Statistics Committee,Bishkek, 20089

Livestock The livestock sector suffered dramatic production decreases after the break up of theformer Soviet Union. Its recovery was slower than the crop sector. Sheep and goat numbersfell by 60% between 1991 and 1996 and currently represent 2.7 million heads. Cattlenumbers fell by 15% and represent 0.6 million heads. There are also horses (0.15 million) and yaks (9,000), as well as a small pig sub-sector andpoultry industry (0.5 million layers). Livestock is predominantly owned in households and peasant farmer units. As such,livestock numbers per unit are very small and easily managed. Winter carrying capacitylimits the number per holding and regulates summer grazing stocking rates 16 . An estimated 40,000 people are seasonal nomads. Spring-borne male calves are usually sold off the mountain ranges or fed with home-grownfodder and grain during winter and sold as fattened steers. Some households regularly buildup cattle herds to 2-3 milking cows in order to produce extra female followers to sell aftercalving as cow-calf couples in spring. Sheep and goat systems are seasonal, involving:o spring lambing;o transhumant mountain grazing (jylo) of the whole flock by family members or ingroups of flocks by village shepherds;o late summer/autumn weaning of male lambs for sale as slaughter stock or stores;o retention of around 50% of ewe-lambs to replace older ewes as breeding stockmembers;o sale of surplus ewe-lambs for slaughter, stores or breeding stock;o fattening of older, cull ewes at the household for eating or sale. Winter-carrying capacity determines the size of the household’s breeding flock which, inturn, depends on a variety of home-produced feeds including the poorer quality wheat,maize and barley grain, and by-products such as straw, stover and bran to supplement inbyegrazing and locally-produced meadow and lucerne hay. Around 25% of pasture has become more or less degraded, and more than 90% of theterritory of the country is prone to desertification 17 . The poultry sector has massively declined in the post-independence period. Out of 11poultry factories, only 4 were left. Livestock productivity is generally low (e.g., 75-80% lambing). However, productivity andoverall production of livestock products (milk, meat, eggs) in January-June 2008 increasedcompared with the corresponding period in 2007 18 . Cattle, sheep, goats and horses’ conditions observed during a WFP mission in August 2008were good. Transhumant patterns were normal in both the northern and southern grazingareas. Selling practices were following the traditional trends. Prices were firm and traders’ expectations were that the prices would remain firm until theregular annual sales began in September, as stock return from summer grazing, and whenprices usually fall. On state farms, sheep prices decreased in the past 2 years between January-March,suggesting increased sales or poorer quality animals in the long winter months.16 Regional Market Survey for the Central Asia Region – World Food Programme, Draft, September200817 Kyrgyz Republic: Poverty Reduction Strategy Paper Progress Report – International Monetary FundCountry Report No.04/200, July 200418 Food Security Information Bulletin of the Kyrgyz Republic, No.2/2008 – National Statistics Committee,Bishkek 200810

Forestry The forests of the Kyrgyz Republic are State property and form a unified State ForestryFund (SFF) which includes forests and land that are not covered with forest but earmarkedfor the forestry needs. In 2003, forests covered 4.3% of the whole territory 19 . There are about 1.2 million people settled near or around forests (22% of total population)and about 150,000 persons live within forest areas (3% population). Forests contribute to livelihoods by providing forest products for direct consumption and byplaying an important role in livestock raising in the form of hay and pastures, both in forestsand in State Forest Farms land (see below) State Forest Farms (leshozes) can allow access to forests through leases 20 . For example,in the leshozes with walnut-fruit forests, leases allow people to collect a certain amount offuelwood, to obtain agricultural plots, to collect hay or to harvest walnuts or fruit for sale. Inexchange for access to forest resources, they are usually expected to pay a share of thewalnut harvest (40-70%), a set amount of walnuts depending on the size of the family (100-400 kg), payment in cash, or carry out certain tasks for the leshoz, such as collecting seedsor preparing and planting of seedlings. In some cases, in exchange for labour implementedfor the leshoz, a person can use forest resources free of charge. Since 2001, the official approach to forest management in Kyrgyzstan is CollaborativeForest Management (CFM). The leshozes developed a lease model for CFM. Leases wereto be issued for 5 years in the first instance, and would be extended for an additional49 years. The tenant receives 100% of all income and products harvested under the lease.Another form of lease is a long-term lease in which people pay a percentage of the value ofthe harvest in cash. However, it appears that the Regulations leave a lot of room forinterpretation. Some of the key issues are:o equitable distribution of plots, and impact on the potential of CFM to contribute topoverty reduction;o approach focused very much on contractual arrangements between individualhouseholds (or, in some cases, small group of households) and the leshozes, withlittle participatory involvement in planning or decision-making, and decision-makingstill largely controlled by the leshozes;o leshozes using CFM as a way to subsidize the costs of fulfilling targets forreforestation and sanitary work in forests;o very little ‘community’ participation and group works, except with arrangementsbetween small numbers of households related by kinship ties or proximity. Traditionally, the Kyrgyz people living in rural areas use wood for heating, but not only. Mostof them use electricity for cooking and heating, as well as coal, gas, animal dung, and cropor bush residues. However, because of poverty, rural people experience difficulties incovering the increased cost of the main energy sources (electricity, gas, coal and firewood).As a result, people in remote areas especially resort to illegally harvested firewood. In areas where settlements are located close to riverside forests (such as in Talas oblast),the forests are under high pressure because of illegal cutting of firewood. Other productscollected in riverside and spruce forests, both for self-consumption and for sale, includeberries, mushrooms and medicinal plants. In more open areas, the land is equally used for(illegal) grazing. In urban areas, fuelwood is not consumed in large quantities, If gas and central heating areunavailable, the most common alternative is electricity or coal. The Government providespoor families with coal free of charge.19 Ensuring Sustainability of Forests and Livelihoods through Improved Governance and Control ofIllegal Logging for Economies in Transition. Working Document, Kyrgyz Republic for the World Bank,Savcor Indufor Oy, June 200520 A leshoz is typically made up of a central office with technical and administrative staff and severalforest rangers. During the Soviet period, the leshozes were organized as cooperatives covering all theresident leshoz “community” (products for everyday life, primary health care, nursery care, schoolingand social amenities). To a considerable extent, some leshozes continue to approximate such aresidential community.11

Energy policies do not seem to contribute to reduce illegal logging, as priorities forenhancing the energy supply are not the remote areas where the lack of alternative energysources is encouraging illegal fuelwood logging. Over the past 10 years, there was no clear trend in the number of incidents and volume ofillegal logging. However, waltnut wood is in high demand in the world markets and illegalextraction has increased, particularly in Jalal-Abad oblast. It is estimated that more than 100,000 people live in villages within, or at the periphery ofwalnut-fruit forests. Forest and non-forest leshoz resources are an essential part of rurallivelihoods, including for the viability of agriculture and livestock raising. Some peopleactually farm on plots within leshoz territories and, although illegal, grazing in leshozterritory is very much the norm and is an important activity in forested areas 21 . The potential for the forest sector in Kyrgyzstan to contribute to poverty reduction is limitedby the fact that the total area of forests is only a small proportion of the land area. Forestsare only likely to contribute to poverty reduction for people living in, or near, forested areas.However, these are often remote, marginalized rural areas with relatively few incomeopportunities. It is important to remember that leshozes often have not only forested areas,but also open land, including pastures and plots for farming. While the Collaborative Forest Management approach adopted by the Government has thecapacity to create employment opportunities for the surrounding population, an analysis ofthe distribution of CFM benefits does not suggest that the poor benefit substantially, or eventhat access to CFM leases is equitable. In general the participation of people in CFMremains limited to a maximum of 5-10% of the total population 22 .Agricultural perspectives 23 Farmers have rationally responded to market signals, including by increasing the area sownunder wheat for the 2008 cropping season. Agricultural production rose by 2.9% in the firsthalf of 2008, partly owing to an increase of 31,000 ha (2.8% of total area) under cultivation. The areas sown to cotton, tobacco, vegetable oil crops and beet continued to decline, butthe area sown to grain rose by 7% and to vegetables by 3%. Together with improved yields,production of grains and vegetables rose by around 30% year-on-year. World fertilizer prices have peaked in the first quarter of 2008 and are expected to remainhigh in the next 3-4 years if the energy prices continue to be high as well. To addressfertilizer shortage in the short-term, input voucher may be an option, accompanied by theprovision of technical assistance and training to recipient farmers and private sector agrodealers24 . The main risks to agricultural growth include 25 :o stagnation of the sector, possibly linked to structural problems (low productivity due tolack of access to inputs, credit and knowledge);o under-investment, particularly from the private sector (fertilizer, machinery,technology);o small farm size. However, only a small share of farmers seems to perceive new (higher) prices as anopportunity. This may be because:21 Poverty and Forestry. A Case Study of Kyrgyzstan with Reference to Other Countries in West andCentral Asia – R.J. Fisher, K. Schmidt, B. Steenhof, N. Alenshaev, FAO, May 200422 Poverty and Forestry. A Case Study of Kyrgyzstan with Reference to Other Countries in West andCentral Asia – R.J. Fisher, K. Schmidt, B. Steenhof, N. Alenshaev, FAO, May 200423 Agriculture in Kyrgyzstan: Growth Engine or Safety Net? – M.K. Light, University of Colorado, October200724 An Overview of Fertilizer Situation in the Context of Food Crises - World Bank, Bishkek 26 June 200825 Kyrgyz Republic. Soaring Food Prices: Food Security Challenges and Opportunities for theAgricultural Sector - M. Guadagni, World Bank, Bishkek 26 June 200812

oosubsistence farmers do not sell their products, so they just perceive the negativeeffects of increased input prices;of seasonality: sales of products has barely started in June 2008, so higher inputprices produced negative effects not yet counterbalanced by higher product prices. The public and private sectors can take measures to support agricultural growth in thecontext of high food and fuel prices:Public sectorPrivate sector Policy/legal framework On-farm Investments with high externalities such as infrastructures (roads etc.)investments Extension/training/information(inputs such Development of farmer organizations (sharing equipment and machinery, as fertilizers,improving bargain capacity)seeds, farm Encourage land consolidation through renting and/or saleequipment)Provision of financial instruments to encourage production and processing Processing(transaction finance, contract farming)infrastructure Anti-trust Food safety for public health Safety nets, including alternative employment programmes for those willing toleave the agricultural sector Incentives to private investments/subsidies, for example by: eliminating VAT onleasing, reducing or eliminating some import duties, improving the businessenvironment, helping financial intermediaries introduce/strengthen financialproducts to support increased lending in agriculture, developing insuranceschemesSoaring Food Prices: Food Security Challenges and Opportunities for the Agricultural Sector - M.Guadagni, World Bank, Bishkek 26 June 2008 For the Kyrgyz farmer, trade liberalization remains an esoteric concept that has notchanged the prospects for growth. Those food products where Kyrgyzstan has acomparative advantage, such as roots, tubers, meat and meat products, are also heavy andperishable. As a result, agricultural trade remains “locked” within the low-income CentralAsian region, and it implies low output prices for local farmers and herders. Prospects forgrowth depends less upon WTO membership and more upon regional integration andtransit/infrastructure such as good roads, bridges and proper transit stations. Kazakhstan and China have invested significantly into transportation infrastructure so thatnow there exist large, good highways and railways across these countries. If these newlinks are accompanied by transit agreements with Kazakhstan, farmers will enjoy risingmeat and vegetable prices, and falling fertilizer costs as trade and transit prices fall. New Kazakh investments into Bishkek and Issyk-Kuul regions have also led to a housingand construction boom. Bishkek residents have suddenly seen their home values doublebetween 2005 and 2007, leading to sharp increases in personal consumption. Asinvestment grows, so will consumption, and eventually urban employment and there will bea new pattern of migration – away from rural areas and towards the cities. As families move urban areas, farming plots left behind would be consolidated, eitherthrough leasing or through sales. In either case, the pattern of consolidation, together withimproved regional infrastructure, and WTO accession by Russia, Kazakhstan and Tajikistan,may finally help Kyrgyz farmers to export products to more lucrative markets.V - Food markets 26 Most of the agriculture remains subsistence-oriented and in 2003, less than 1/4 th of cropand animal products were marketed. Local production covers practically all the country’sannual consumption needs of milk, meat and potatoes, but imports of wheat, vegetable oil,sugar and some vegetables are necessary.26 Regional Market Survey for the Central Asia Region - WFP, Draft, September 200813

For the 2007/08 agricultural campaign, the MoA forecasts an exportable surplus of 60% forpotatoes (total produced 1,376,000 tons), 14% for vegetables and 14% for melons, and nosurplus for forage. Kyrgyzstan does not need to import potatoes, vegetables, fruits, milk products or meat (selfsufficient),while 85% of sugar and 44% of vegetable oil needs are imported. Physical access is restricted. All imported goods from Russia (sugar, pasta) must enterthrough Kazakhstan or Uzbekistan. Road traffic through Uzbekistan is subject to a blankettariff of US$400 per truck, but no charges are attached to rail wagons. Wheat and wheat products from Kazakhstan are transported directly by rail, although roadaccess is available. International road and rail prices have increased since 2007 by 60%and 10% respectively. No such increases were noted for in-country road transport. Trade is liberalized. There are no import taxes on food stuffs, although sugar is subject toseasonal tariffs that may reach 30%. In July 2008, the Government introduced an export tax of 100% on the sales of wheat,wheat products, oilseeds and vegetables, effectively blocking export of home-producedgoods and their re-export of imported goods. No export tax has been imposed on vegetables, fruits and their derivatives. A combinationof small size of the individual production units and absence of processing plants means thatthis type of produce is consumed locally and traded through a series of trading steps fromvillage to main centres. There are 3,000 small-capacity flour mills in villages and rural towns, which apply anaverage tariff of US$7.5 per 50 kg sack. Some 25 larger mills belong to the Millers’Association and sell flour to the main city bakers and distributors. Some 575 mills occupy anintermediate position. VAT on wheat flour was reduced from 20% to 10% in January/February 2008. Smaller millsdo not have to charge Value Added Tax (VAT) on flour. In addition to country-milled flour, wheat flour is imported from Kazakhstan and Russia andsold through wholesaler distribution networks. Scroll-down credit is commonplace all alongthe supply chain from the mill to the Kazakh exporter for imported wheat. Larger millers buy local and Kazakh wheat and mix them in a 3:1 ratio to maintain quality. Farm-gate wheat prices have increased since 2007, in line with international prices. As ofJune 2008, they stood at about US$0.45/kg (~US$22 for 50 kg) for state producers andpeasant farms and about US$0.35/kg (~ US$17 for 50 kg) for households. Estimated prices of wheat grain in April 2008 were US$380-430 for imported wheat andUS$450-507 for local wheat, compared to US$260 and US$240 respectively in May 2007. Based on <strong>data</strong> collected from traders and millers, wheat flour prices were as follows:Estimated wheat flour prices May 2007- June 2008May 2007 June 2008Prices pertonImportedLocal ImportedLocal ximportedLocal ximportedLocalEx-mill ortrader US$366 US$420 US$340 US$609 US$700 US$528pricesWholesale n/a n/a barter US$816 US$760 barterRetail US$453 US$450 barter US$850 US$820 barterRegional Market Survey for the Central Asia Region - WFP, Draft, September 2008Market integration Marketing of agricultural produce is hampered by poor physical and institutionalinfrastructure, and inadequate access to finance 27 . Markets are generally segmented dueto:27 Poverty, Livelihood Vulnerability and Food Insecurity in the Kyrgyz Republic – M. Abi Samra, WorldFood Programme, March 2007 (unpublished)14

ooooooRugged geography, which separates the country into two economic regions and twomarkets that lack integration. The 2 economic centres of the country, the Chui valleyin the north and Ferghana valley in the south, are separated by mountains;Dependence on neighbouring countries for reaching internal and external markets.The Kyrgyz Republic’s road and railway systems in the north are part of thetransportation networks of Kazakhstan, and in the south they are part of the networksof Uzbekistan.Restrictions on cross-border trade and road checks internally (bribes).Poor road conditions.High fuel costs.Lack of information on market demands for commodities. Market segmentation and inefficiencies result in:o High marketing margins and important differences between farm-gate prices andmarket prices (low revenues for the producer, and high prices for the consumer);o High variation in prices across oblasts for similar commodities, depending on theirproximity to external markets;o Exclusion of many producers from access to the market and from gains from higherprices;o Poor crop diversification, as producers are reluctant to engage into commercial cropswithout guarantee of the market. The WFP mission analyzed price <strong>data</strong> 28 for the period January 2007-June 2008 for wheatflour, vegetable oil, sugar, sheep meat, diesel and wage labour from 3 markets: Bishkek,Naryn and Osh. Results suggest that:o except for sugar, prices of all commodities have increased in the 3 markets;o wage labour, vegetable oil and sheep meat seem to have similar rates of increase inboth Bishkek and Naryn;o there were strong correlations between the prices of vegetable oil and diesel inBishkek, and between vegetable oil and wage labour in Naryn and Osh, and betweenthe prices of sheep meat and diesel in Bishkek and Naryn. There seems to be a high level of market integration for all commodities except sugar andwage labour. More specifically:o vegetable oil prices are closely related in Bishkek and Naryn;o diesel prices are closely related in Naryn and Osh. Over the previous 19 months:o wheat flour prices were close in the 3 markets, which appeared fully integrated;o sugar prices were also close in the 3 markets, but they were not integrated;o vegetable oil was more expensive in Naryn than in Bishkek and Osh;o sheep meat was more expensive in Bishkek than in Naryn and Osh, with the latter2 fully integrated;o diesel prices were close in the 3 markets, with Naryn and Osh fully integrated;o wage labour rates were lower in Naryn than in Bishkek and Osh.Average prices per unit (June 2008)Bishkek Naryn OshWheat flour 0.63 US$/kg 0.59 US$/kg 0.55 US$/kgSugar 0.79 US$/kg 0.83 US$/kg 0.86 US$/kgVegetable oil 1.85 US$/lit 1.98 US$/lit 1.75 US$/litSheep meat 5.16 US$/kg 4.38 US$/kg 4.37 US$/kgDiesel 0.73 US$/lit 0.70 US$/lit 0.70 US/litWage labour 5.54 US$/day 3.23 US$/day 5.53 US$/dayRegional Market Survey for the Central Asia Region - WFP, Draft, September 200828 Price <strong>data</strong> were obtained from KAMIS, an independent agency established with DFID ‘Know HowFund’ in the late 1990s, and the National Statistic Committee (Regional Market Survey for the CentralAsia Region”, WFP, Draft, September 2008)15

VI - Economic situation and poverty 29Macro-economy Kyrgyzstan is a ‘low income country’ considered to be the 2 nd poorest ex-Soviet republicafter Tajikistan. The northern part of the country borders onto the middle income country of Kazakhstanwhere the economy is booming due to oil. The southern part of the country is morepopulous and agrarian, and it borders onto the lower income – and largely unreformed –economies of Uzbekistan and Tajikistan. The initial years (1992-95) of transition from the Soviet central system witnessed a dramaticdecline of the economy. Thereafter, steady GDP growth was recorded, linked to the exportof gold and remittances from migrants. Social upheavals in 2005-06 caused growth to falter.In 2007 economic growth picked up and GDP real growth was posted at 8.2%. Growth ratesfor 2008 are so far slightly slower than projected (around 7%). In 2007, GDP per capita wasestimated at US$710.2003 2004 2005 2006 2007Real GDPgrowth7% 7% -0.2% 3.1% 8.2%Kyrgyzstan Country Report August 2008 - The Economist Intelligence Unit In 2007, agriculture contributed to 34% of GDP, services 47% and industry 19%. Thisreflects the industrial decline that followed the break-up of the former Soviet Union (FSU).Kyrgyzstan is now one of the least industrialized countries of the FSU. It also reflects thenegligible contribution of the oil and gas sector to overall production, unlike in most otherCentral Asian states. Real growth rates of the main sectors of the economy in 2006-07 were: 4.7% for industry,1.5% for agriculture, 20.2% for construction and 11.7% for services. Small and medium-size enterprises contribute to almost half of GDP and about 13% ofemployment (excluding farms) 30 . Estimated Growth National Income (GNI) per capita 31 was US$550 in 2007, close to thelevels of Tajikistan and Uzbekistan, but much lower than Kazakhstan (more than US$3,000). The implementation of the reform agenda to expedite the transition from a centrally plannedeconomy to a more market based one has yet to be completed thus stymieing efforts topursue policies that improve the welfare of the population and encourage business activityand competition 32 . There are important regional economic disparities between economically more dynamicregions, such as the capital Bishkek and its surroundings (e.g. Chui oblast) in the north ofthe country, and remote regions mainly in the south and in the centre. Manufacturing isconcentrated mainly in Bishkek and the northern Chui oblast, with pockets in the few otherurban areas, notably Osh. Rural areas have often relapsed into subsistence agriculture anda non-cash economy. Gold and antimony mines are located in remote mountain areas. The informal sector also plays an important. Most of the informal activities include selfemployment,subsistence farming, unpaid jobs performed by family workers, occasional orcasual jobs, and second jobs. Most of these are in the agricultural sector and have asubsistence nature. The rate of informal employment was estimated at 59% in 2003 andwas amongst the highest of the other Central Asia countries 33 .29 Kyrgyz Republic Poverty Assessment – September 2007, World Bank (Report No. 40864-KG)30 Business Environment in the Kyrgyz Republic – Reforms Underway and the Need for Implementation– World Bank - Government/WB/IMF Workshop, Bishkek, 25 June 200831 World Bank statistics 200732 Kyrgyz Republic Poverty Assessment – September 2007, World Bank (Report No. 40864-KG)33 World Bank 2003, quoted in “Poverty, Livelihood Vulnerability and Food Insecurity in the KyrgyzRepublic – M. Abi Samra, World Food Programme, March 2007” - Unpublished16

Kyrgystan’s rich water resources are used to produce hydroelectric power. The country alsohas significant deposits of gold and rare metals, minor deposits of coal and natural gas, anddeposits of mercury, lead and zinc. In the first half of 2008, coal production increased by 33% due to the resumption of activitiesat previously inactive enterprises, and by a rise in production at some small coal companiesin the south of the country, which is rich in coal. Industrial production, particularly foodprocessing,has been hampered by a shortage of agricultural products, high purchaseprices for food, growing energy prices, increased costs for delivery of agricultural productsto processing facilities, and electricity shortages. Principal exports 34 in 2007 were mineral products (29% of total), precious metal and stones(20%), textiles (11%) and glass/construction material (5%). The main export destinations in2007 were Russia (21% of total), Switzerland (20%), Kazakhstan (18%) and Afghanistan(10%). Principal imports were mineral products (32%), machinery/equipment (14%), chemicals(9%) and food/beverage/tobacco (8%). In functional terms, in 2007 consumer goodsrepresented 29% of imports (36% in 2005), energy 29% (25% in 2005), investment 22%(18% in 2005). The main import providers were Russia (40%), China (15%), Kazakhstan(13%) and Uzbekistan (5%). Since 2003, Kyrgyzstan has undergone a deep re-orientation towards the Central Asiaregion and Russia (CAR region). CAR economies, Kazakhstan in particular, account formost of Kyrgyzstan’s foreign trade turnover, and have also become the major sources ofForeign Direct Investment inflows. Instead of being handicapped by its landlocked situation,the country’s close location to other landlocked booming economies has become the sourceof considerable benefits 35 . While re-exports (almost exclusively to CAR) have been the major lever of an impressiveexternal performance, exports of goods have expanded as well, particularly in 2006.Clothing exports have been particularly successful. It is a low tech and labour intensivesector, which is much in line with Kyrgyzstan’s endowments in factors of production andattained level of technological development. Exports to CAR countries increased in terms of GDP by 40% over 2003-06, and re-exportsexpanded dramatically from 8% in 2003 to 66% in 2006.Share of Kyrgyzstan in total exports2003 2006Kazakhstan 9.8% 20.5%Russia 16.7% 19.4%China 4.0% 4.8%Uzbekistan 2.8% 3.5%Tajikistan 3.2% 3.0%Turkmenistan 0.4% 0.3%Total 36.9% 51.4%How Kyrgyzstan has seized Opportunities Offered by Central Asia’s Economic Recovery. Patterns andModalities – B. Kaminski, World Bank, 24 June 2008 Given its suddenly acquired wealth thanks to soaring prices of oil, Kazakhstan has emergedas a major:o Importer of Kyrgyz products: its share in Kyrgyz exports doubles in 2003-06 to 21% oftotal, and it competes with Russia as a major export destination;o Foreign investor: its share in Foreign Direct Investment flow to Kyrgyzstan rose from9% in 2003 to 41% in 2006 and 47% in the first 9 months of 2007. The main donors supporting the Kyrgyz Government include: World Bank, AsianDevelopment Bank, European Union (in the framework of its Food Security Programme and34 Kyrgyzstan Country Report August 2008 – The Economist Intelligence Unit35 How Kyrgyzstan has seized Opportunities Offered by Central Asia’s Economic Recovery. Patternsand Modalities – B. Kaminski, World Bank, 24 June 200817

of its TACIS programme), UNDP, Islamic Development Bank, Switzerland, Germany andJapan.Poverty Since 2000, the National Committee on Statistics, in collaboration with the World Bank,undertakes a quarterly household survey to ascertain the poverty situation. A new KyrgyzIntegrated Household Survey (KIHS) was introduced in 2003, to replace the HouseholdBudget Survey. It comprises 5,100 households per quarter, 1/3 rd of which is sampled eachmonth 36 . Each local municipality (ail okmot) also collects <strong>data</strong> on the poverty/wealth situation of itsinhabitants twice each year (in January and July). Data indicate how many households arecategorised as very poor or poor. Households that are perceived to be in these categoriesare visited individually by a staff of the ail okmot and asked about their income. Income ismost likely understood as cash available per month 37 . Despite the lack of comparable measures, it makes no doubt that poverty rates increaseddramatically, up to 4 folds, in the first 5 years following the break-up of the former SovietUnion. The use of assets and savings to cover part of the expenditure requirements in thefirst stage of the transition might be one of the factors that contributed to the subsequentincreases of poverty rates, as the population was progressively exhausting this copingmechanism. However, since 2000, the Kyrgyz Republic has seen impressive poverty reduction inspite of moderate economic growth. This was achieved through the expansion of privateconsumption which was driven mostly through greater wage income resulting from theexpansion of sectors employing mostly unskilled and low-wage labour (trade and tourism,and construction). A rise in public (pensions and social benefits) and private (remittances)transfers also contributed to poverty reduction. The 2005 poverty report indicated that increased social assistance and private transfersbenefited the poorest, while labour income growth helped the moderately poor (2 nd and 3 rdquintiles). Estimated poverty (based on consumption measurement 38 ) was 43% of the population in2005, 40% in 2006, and 35% in 2007 39 . Extreme poverty – those whose consumption wasinadequate to even meet food needs – was 11% in 2005 and 7% in 2007, down by 2%compared to 2006. Compared to other countries of the Central Asia region, these levels are better than thepoverty rates observed in Tajikistan but worse than all the other countries. The value of the poverty line in 2007 was 11,560 som/capita/year, while the value of theextreme poverty line was 7,680 som (respectively about US$0.9 and US$0.6 per capita per36 Kyrgyz Republic Poverty Update. Profile of Living Standards in 2003 – World Bank Report No.36602,August 200537 Poverty and Forestry: a Case Study of Kyrgyzstan with Reference to Other Countries in West andCentral Asia – R.J. Fisher, K. Schmidt, B. Steenhof, N. Akenshaev - FAO, May 200438 The estimation of level of poverty is complicated, and though a “standard” methodology exists, thereare many judgment calls required, such that no two persons will come up with the exact same estimatesof poverty. Poverty was estimated by the World Bank measuring consumption and comparing it with athreshold below which people are considered poor (the ‘poverty line’ which was US$1.08 per capita perday in 2003). Consumption is estimated based upon selected household expenditures on food and nonfoodgoods and services, the monetary value of household consumption of own-produced goods, andthe estimated benefits derived from durable goods (such as cars and washing machines). Foodexpenditures include both actual expenditure and the valuation of self-produced food that is consumed.Non-food consumption includes clothing, utilities, services, personal care and hygiene items,communication and transportation, and other non-food expenditures.The food poverty line was calculated as the cost of buying a diet of 2100 kcal/capita/day given the foodconsumption patterns of the reference population (relatively low income). It used 95 food items out of579 recorded in the Kyrgyz food diary of 2003.39 Socio-economic Situation of the Kyrgyz Republic - National Statistics Committee, Bishkek, 200818

day) 40 . These values indicate that the national poverty lines are lower than the internationalpoverty lines (respectively about US$2.1 and US$1 per capita per day at purchasing powerparity). The incidence of poverty is higher in rural areas (51% of the rural population was poor in2005 and 42% in 2007) compared to urban areas (30% of the urban population was poor in2005 and 23% in 2007), despite the fact that a notable reduction of poverty was registeredin rural areas. Extreme poverty rates in rural areas were 8% in 2007, compared to 3% inurban areas. Poverty rates declined by 6% in rural areas between 2006 and 2007, and by 3.5% in urbanareas.PovertyExtreme poverty2005 2006 2007 2005 2006 2007Overall 43% 40% 35% 11% 9% 7%Urban 30% 27% 23% 6% 5% 3%Rural 51% 48% 42% 14% 11% 8%Food Security Information Bulletin No.2/2008 – National Statistics Committee, Bishkek, 2008 The majority of the poor live in rural areas: about 3 out of every 4 persons below the povertyline reside in rural areas (76%). However, differences between rural and urban areas maska wide poverty gap between the capital Bishkek and other towns. While most of the poorlive in rural areas, other towns than Bishkek also presented rates of poverty almost ashigh as in rural areas in 2003. Poverty is deeper in rural areas: extreme poverty is twice as high than in urban areas, with8% of rural residents living in extreme poverty in 2007, compared to 3% of the urbanpopulation. The level of extreme poverty has not changed much (the poverty gap decreased from 3%to 2% between 2006 and 2007). This result indicates that the poor who are closer to thepoverty line are better able to benefit from the changes that are taking place in the country.At the same time, the status of the poorest strata of the population, especially people livingin urban areas, has improved less noticeably. The situation is also related to the continuedinternal migration from rural areas into towns, with migrants unable to adapt rapidly, findwork and increase their incomes 41 . Data from 2003 showed striking differences in access to utilities between rural andurban areas. While some utilities such as central heating, sewerage and hot water wererarely provided in rural areas, the low access to clean water source and telecommunicationwas worrying. Gas was scarce in rural areas and electricity interruptions very frequent. Disparities in housing and infrastructure are often larger between urban and rural areasthan between poor and non-poor in both areas. Thus in terms of non-income poverty, amuch greater proportion of the population suffers from some aspect of deprivation, thanindicated by the income-based poverty line. Inequality as measured by the Gini coefficient was 0.44 in 2007, showing no improvementscompared to 2006. The poverty analysis done using households’ <strong>data</strong> of 2003 indicated thatrural areas have in general less inequality than urban areas. Within oblasts, the poorer theoblast, the less consumption inequality it tended to have. Regional level poverty rates are polarized. In 2007, the highest rates of poverty were inJalal-Abad (53%), Osh (47%) and Naryn (45%) oblasts, while the lowest rates were inChui oblast (15%) and Bishkek city (5%). Compared to 2006, a significant reduction ofpoverty rates was noted in Batken oblast (by 10%). In the other oblasts, reductions of40 Food Security Information Bulletin of the Kyrgyz Republic, No.2/2008 – National Statistics Committee,Bishkek, 2008 – Exchange rate considered: 1 US$ = 36.3 Som41 Kyrgyz Republic: Poverty Reduction Strategy Paper Progress Report – International Monetary Fund,Country Report No. 04/200, July 200419

4% to 5% were noted. Extreme poverty reduced significantly in Batken (by 7%) and Jalal-Abad (by 5%) oblasts.% poor2003 2005 2006 2007Kyrgyzstan 50% 43% 40% 35%Urban 36% 30% 27% 23%Rural 57% 51% 48% 42%Bishkek city 22% 11% 5% 5%Issyk-Kul oblast 52% 51% 44% 39%Jalal-Abad oblast 58% 56% 58% 53%Naryn oblast 72% 51% 49% 45%Batken oblast 85% 59% 51% 40%Osh oblast 56% 56% 52% 47%Talas oblast 55% 44% 40% 35%Chui oblast 28% 22% 20% 15%Kyrgyz Republic Poverty Assessment. Volume I: Growth, Employment and Poverty – World BankReport No.40864, September 2007 – Food Security Information Bulletin No.2/2008 – National StatisticsCommittee, Bishkek, 2008 Changes in the ranking of some of the oblasts according to indicators used (Osh, Jalal-Abad, Talas, Issyk-Kul) make it difficult to rely on poverty figures for geographical targeting.Data at the rayon level would be preferable but are not available with the current KIHSsurvey approach (statistical representativity at oblast level only).Characteristics of the poor Results 42 using <strong>data</strong> from 2003 indicated that the share of food consumption in totalhousehold consumption exceeded 50% in all wealth groups. Poor households spentproportionally more on food. Non-food commodities took almost the same proportion ofexpenditures among all groups, at about 20%. Utilities represented another importantexpenditure for all households, taking by and large about 13% of total consumption. Though some differences in consumption patterns between rural and urban areas existed,they were not so large. As expected, rural households spent more on food (included ownproduction valued as expenditure), which takes almost 2/3 rd of expenditures, whereas urbanhouseholds spent 53%. Rural households spent relatively less on non-food items, utilitiesand other services (heating, hot water, sewerage and waste disposal, telephone). The income level of households and location in rural/urban areas directly correlated with theaccess to various utilities and housing conditions, except electricity, which isuniversally available (though unreliable in rural areas). In urban areas, some 2/3 rd of thenon-poor have access to sewage systems, but only 27% of the poor do; 60% of the nonpoorhave access to central gas, but only 29% of the poor do. Only 1/3 rd of the urban poorhave access to running water, compared to 71% of the non-poor. Urban poor do not have access to garbage collection as the non-poor do (35% versus 66%). Results from 2003 indicated insignificant differences between poor and rich households interms of access to health facilities. However, while heath services seemed widely available,the cost of services may be serious obstacle. The poor own significantly less durables than the non-poor, including TV, washing machine,refrigerator, phone. Gap in access to public transport was not so large among the first 4 wealth quintiles, butmore important in urban than in rural areas. Only 30% of the poor, compared to 40% of thenon-poor, have less than 5 minutes to the nearest form of public transport. Poorer urbanzones are also likely to have much less frequent and reliable forms of transport. The42 Kyrgyz Republic Poverty Update. Profile of Living Standards in 2003 – World Bank Report No.36602,August 200520

physical segregation of labour markets may be an important obstacle for people in poorerareas. Large households with young children have a much higher probability of living below thepoverty line. The rural poor workers have larger households with more dependents. A household with 6 members is more likely to be twice as poor according to the generalpoverty level (Guaranteed Minimum Consumption Level) and 6 times poorer according tothe extreme poverty level, than a household with 3 members 43 . Poor households haverelatively less income generating members and more net consumers, than otherhouseholds. Data from 2005 indicated that female-headed households were equally likely to beextremely poor as male-headed households, but the risk of moderate poverty was smallerfor female-headed households. It may be that some female-headed households had a malemigrant worker abroad, who contributes to household income. Data from 2003 indicated alower prevalence of female-headed households among the poorest quintiles. This appearedto be related to demographic and location factors. Female-headed households tended to besmaller than male-headed households. In addition, female-heads of households were olderand less likely to have young children. Households with older heads are more likely to be poor: 51% of the population living inhouseholds whose head is older than 65 years are poor. However, only 35% of thepopulation aged 65 years or more is poor. This may indicate the importance of adultchildren caring for older family members. Data from 2006 indicated that among families withpensioners, those with 3 pensioners had the highest risk to become extreme poor. Education is negatively correlated with poverty. However, the largest benefit in escapingpoverty accrues to those with a higher education degree, where only 18% of people wholive in households headed by a person holding such a degree live in poverty, compared to53% of those with general <strong>secondary</strong> degree. Data from 2003 showed that, generally, children living in richer households tended to havebetter enrolled in school than in poorer households. The latter tended to have more reasonsto not let children go to school, naming lack of money to finance the basic necessities forschool, as well as children having fewer incentives to study, and being more prone todiseases. Data from 2005 indicated great differences in poverty levels depending on the nationalityof household heads. The group with the highest poverty incidence is the Uzbek minority,predominantly living in the poorer southern regions. The richest group is the Russianminority, living in the more affluent north. However, other factors come into play, such ashousehold size, education and residence. Children living in families of internal migrants are especially at risk as such families donot receive State’s allowances because they often lack the requisite documents. Child labour is a direct consequence of poverty. In rural areas of Kyrgyzstan, some of thedeterminants of child labour are more present than in urban areas: lower household incomelevels, higher poverty incidence, low quality and accessibility of education services, andimportant differences in labour demand across seasons (need for additional hands duringharvesting time). However, a large number of children working in the streets of Bishkek andother cities are also believed to belong to migrant labour families, or have been sent by their(rural) families to town for work. Apparently, old age is not a good predictor of poverty in the Kyrgyz Republic. The connection between employment and poverty also did not seem so strong, even thoughthe poor were more likely to be unemployed. There was no large rural/urban differencebetween the poor and non-poor in terms of economic activity, but unemployment rates of43 Quoted in “Public Expenditure Review on Social Sector in the Kyrgyz Republic” – UNICEF, 200621

the poor were twice higher than of non-poor in both rural and urban areas. In general, poorwomen were the group who had the hardest time finding a job in the labour market. The agriculture sector presented the highest incidence of poverty (more than half of thoseemployed in this sector were poor -56%). Within the industry sector, higher risks of being inpoverty were for those employed in construction. In the services sector, unexpectedly highpoverty rates were observed among those employed in trade and catering, while thoseemployed in health care and education had slightly lower poverty rates than average for thissector. There were no large differences in the patterns of income sources between differentconsumption (wealth) groups. However, the difference between urban and rural areas in thereliance on income sources was very significant for some items. Salary, self-employment, seasonal and additional earnings were the most prevalent sourcesof income (about 80% of households) and the most important based on share of totalincome on average (around 60%). There was no large difference in the share of incomeearned from these sources between the poorest and the richest quintiles. However, as theworking poor are locked into activities with low productivity and high informality, they obtainlower wages and live with more insecure working conditions overall. Other sources of income included pensions (38% of households on average, 13% ofincome), sale of property (9% of households, 7% of income), social transfers (45% ofhouseholds, 1.5% of income) and private transfers (49% of households, 10% of income). Pensions were a more important source of income for poorer households, although inmonetary terms an average pension in the top quintile was 1.6 times higher than in thepoorer quintile. Private transfers tended to be more important among poor households, butas in the case with pensions, the average size of the transfers received by the richestquintile was almost twice higher than that of the poorest quintile. Social transfers were more frequent and represented a larger share of the income ofpoorer households. The average monetary value of these transfers was largest for poorhouseholds, suggesting that social programmes are well targeting the poorer households.Consumption (wealth) quintilesLocationPoorest 2nd 3rd 4th Richest Rural UrbanTotalSalary,selfemplt,seasonalearnings% HHs% income80%58%86%67%83%63%82%68%78%63%79%59%85%68%81%64%Pensions% HHs 36% 33% 42% 40% 36% 41% 34% 38%% income 17% 13% 16% 13% 12% 17% 10% 13%Sale of % HHs 7% 10% 9% 8% 9% 9% 8% 9%property% income 2% 4% 7% 6% 8% 5% 8% 7%Social % HHs 52% 42% 42% 41% 49% 35% 59% 45%transfers% income 6% 3% 1% 1% 1% 2% 1% 1%Private % HHs 52% 37% 52% 48% 52% 46% 52% 49%transfers% income 13% 9% 10% 8% 12% 10% 10% 10%Other % HHs 21% 19% 14% 18% 17% 22% 11% 18%income % income 4% 4% 3% 4% 4% 6% 2% 4%Kyrgyz Republic Poverty Update. Profile of Living Standards in 2003 – World Bank Report No.36602,August 2005 The population census conducted in 1999 showed that 29% of Bishkek populationconsisted of internal migrants from other oblasts. Poverty results did not indicate a negativerelationship between migrant status and welfare state. However:22

o The overall share of internal migrants in the total population was less than 7%, whichimposes careful consideration and use of the results;o this outcome can hide a possible under-coverage of households in new settlementscreated around Bishkek city after 1999, as the KIHS does not include these areas. The results also indicated that the migration flows in the country did not have dominantrural-urban character, as rural-urban and rural-rural directions existed concomitantly. Based on the 2003 <strong>data</strong>, access to any land and ownership of farm equipment did notguarantee higher consumption (wealth). Virtually all households now have land holdings.However, the 2005 poverty assessment indicated that the poor in rural areas have smallerland holdings than the non-poor. In the poorer southern regions, plots are smaller. The relation is not observed in urban areas. On average, poor households with access toown land have plots of less than 0.2 ha, while non-poor households have plots of about 0.3ha. Because the poor in urban areas are less likely to live in the most densely populatedcentral areas of cities, they have more access to land than the non-poor, but the area isvery small (about 20 x 20 meters). Having livestock increased household consumption for a considerable extent. In 2003, halfof rural households held cattle with an average herd of 2.6 heads. Only 1/3 rd of ruralhouseholds hold small ruminants, with a relatively low herd (12.5 heads per owner). Morehouseholds are engaged in raising animals in the southern oblasts due to the small size ofland plots (36% versus 25% in the north). According to a ranking exercise conducted in rural south of the country 44 , a poor householdhad the following characteristics:o no livestocko very limited, often not very productive land resources (non-irrigated, land on slopes etc.)o no other sources of revenue than agriculture and collection of forestry products;o adults unemployed;o vulnerable to externally-induced shocks, such as low agricultural yield following bad weatherconditions, due to a poorly diversified farming system;o many children;o depends on support from other households;o lives on a very basic diet, in difficult times mainly consisting of bread, tea and possibly potatoes;o chronically short of cash;o has difficulties to meet expected contributions to traditional social events, but often makes themdespite the expenses involved in order to remain in the local social network;o poor clothing and housing conditions: old small houses built of clay, without insulation, poorheating; often do not have house of their own and are forced to rent one.Labour markets Since the poor have few assets and safety net programmes are limited (see Section X), thelabour market is a key transmission mechanism for growth to affect poverty levels. In 2003-2005, trade and tourism, and construction – both sectors that employ low wagelabour – contributed the most to employment growth in the Kyrgyz Republic. Yet, it was onlythe trade and tourism sector and agriculture which saw productivity growth during thisperiod 45 . Labour income comprises more than 50% of total income for the households in the lowestwealth quintile. For the poorest quintile (20% of the population), all forms of income roseduring 2003-2005, with public transfers (such as pensions and social assistance) andprivate transfers (such as remittances) growing by about 80% (though from a small base),and labour income growing by over 50%. However, the second quintile (roughly equal to the moderately poor) benefited the mostfrom the labour market as their wage income rose by 80% and social benefits fellsignificantly by about 25% during the period 2003-2005.44 Poverty and Forestry: a Case Study of Kyrgyzstsn with Reference to Other Countries in West andCentral Asia – R.J. Fisher, K. Schmidt, B. Steenhof, N. Akenshaev - FAO, May 200445 Kyrgyz Republic Poverty Assessment. Volume I: Growth, Employment and Poverty – World BankReport No.40864, September 200723

Unemployment rose to 8% in 2005. However jobs were created, in sectors which tend toemploy unskilled, low-wage workers, thus benefiting the poor proportionately more. Theexpansion of employment of the poor went in hand with rising real wages. However, realwage growth exceeded productivity growth (11% versus 2%), a feature that ultimatelydiscourages the creation of jobs by employers. The results from the poverty profiling undertaken in 2003 indicated that households whosehead is unemployed are poorer than those with an employed head. Underemployment is an issue. Some 30% of workers work less than 30 hours. Thoseemployed in the agriculture sector, the self-employed, the poor and those with no education,work less hours. The Government launches temporary public works to assist the unemployed. In 2003, about24% of the unemployed had been covered by temporary public works, for an averageduration of 2.5 months. These values have been decreasing since 2000 (respectively 30%and 9.4 months) 46 . In addition, in 2003 the share of the micro-credit recipients was 32% for the poor andunemployed in small cities and towns, remote and mountainous areas, down from about40% in 2000. Labour markets in the Kyrgyz Republic are highly segmented. There is a divide betweenurban and rural markets, between formal and informal labour markets, and betweenopportunities available to women and men.o In rural areas, about 2/3 rd of all jobs are in the rural sector (2003 <strong>data</strong>) and themajority of these (63%) are in agriculture; some 20% of employment in urban areas isin the agricultural sector.o Rural non-farm activities include public services (e.g. education, health, publicadministration), followed by commercial services (especially the trade sector) whichprovide 12% of jobs, and industry (mostly mining) which provides the remaining 8%.o In urban areas, trade services, manufacturing and public sector services aredominating; in rural areas, services – predominantly the public sector- accounted foronly 28% of the jobs in 2003. Only 1/3 rd of employed persons are self-employed, another 1/3 rd are employees and 20%are unpaid family workers. Half of the jobs are in the informal sector 47 , with its many negative implications (jobinsecurity, low pay, irregularity of work). Informality is more prevalent in rural areas (54%versus 39% in urban areas). Women are also more prone to work in the informal sectorbecause they are more likely to work in the agricultural sector. As many as 86% of workerswith no education are employed in the informal sector, and even those with 9 years ofcompleted basic education are 76% informally employed. Wage earnings are the most important source of income among rural households. Morethan half of the rural households also rely on crop and livestock sales. The vast majority of the employed poor work in the farm sector (60% of all farmworkers) – consequently, agricultural growth plays an important role in poverty alleviation inthe country. The poor are under-employed and work 20% fewer hours than the non-poor. Of those working in non-farm sectors, 60% are non-poor. Rural residents employed in nonfarmactivities are better off than those working in farming.46 Kyrgyz Republic: Poverty Reduction Strategy Paper Progress Report – International Monetary FundCountry Report No.04/200, July 200447 The National Statistics Committee defines informal sector activities as those that take place inunregistered units as well as in units that have fewer than 5 employees. The results presented here(World Bank) consider as informally employed all those who run or work in an unregistered firm oractivity (employed in informal sector) AND all those who work with a verbal contract in registered firms(informally employed in the formal sector). All unpaid family workers as well as those working inhouseholds are also considered to be informal workers.24

Since 2005, the State sector has seen rapid wage growth. However, in 2007-08, raisingconsumer price inflation has led to higher wage demands elsewhere, with nominal wagegrowth reaching 36% in June 2008. Recorded wages remain low, but many supplementtheir incomes with remittances sent from relatives working abroad, and with incomes earnedin the large shadow economy.Year January May December2,5572,8084,4042006(US$62) (US$69) (US$114)Average gross monthly wage3,1453,7695,6572007(Som/US$)(US$82) (US$99) (US$162)4,3355,146 482008-(US$121) (US$141)Kyrgyzstan Country Report August 2008 - The Economist Intelligence UnitExamples of monthly salariesActivityAverage monthly salaryDoctor (2004)1126 Som/month (US$31)Teacher, highly qualified, high workload compared to 1380 Som/month (~US$38)standards (2004)Young graduate of higher educational institutions 400-500 Som/month (~US$11-14)Child mentor in orphanage or boarding school (2004) 800 Som/month (~US$22)Forester (2005)600-800 Som/month (~US$15-22)Public Expenditure Review on Social Sector in the Kyrgyz Republic – UNICEF, 2006Ensuring Sustainable of Forests and Livelihoods through Improved Governance and Control of IllegalLogging for Economies in Transition - Working document, Kyrgyz Republic for the World Bank, 2005Migrants and remittances Rural areas, because of low income levels and lack of diverse job opportunities, are themajor source of internal and external migrants in the Kyrgyz Republic. Internal migration seems to have reached a peak in 1994-98, with some 100,000 migrantsper year, but fell between 1999 and 2003, with some 50,000 people (1% of the population),changing their place of residence each year 49 . Only Bishkek city and the Chui oblast in thenorth saw in-migration, and all other oblasts had negative balances. This shows cleardirection of labour from mostly rural peripherals into economically developed capital city andrelatively land abundant Chui oblast. These are <strong>data</strong> based on administrative records, and the number of internal migrants islikely to be considerably higher. New established settlements around capital city (‘novostroiki’) are mainly occupied withinternal migrants with most of the residents not being registered. As of 2007, there were 26such settlements around Bishkek, with an estimated 200,000 people, but the real number ishigher due to lack of residence permission for a large portion of residents. Internal migration is putting pressure on urban labour markets. It increases demand forpublic services, puts pressure on housing prices, and creates tensions in urban labourmarkets. With regard to external migration, since 2000, remittances played a significant role inraising welfare and reducing poverty both directly and indirectly. Yet, these remittances aremostly used to increase private consumption and the construction of housing rather thaninvestment in the economy. The increase in money from abroad led to an expansion in thedemand for services locally and an increase in imports.48 At an exchange rate of 36.4 Som for 1 US$49 Kyrgyz Republic Poverty Assessment. Volume 1: Growth, Employment and Poverty - World BankReport No.40864, September 200725

Many young Kyrgyz workers find it more lucrative to work abroad in menial jobs than to takelow-paid employment at home – for which they often lack sufficient qualifications in anycase. Estimates of the number of Kyrgyz labour migrants working abroad vary widely. Someput it at 1 million 50 , while others mentioned about half this number 51 . The majority of themigrants are from the rural south, including Osh, Jalal-Abad and Batken oblasts. Migration significantly mitigates the problem of unemployment inside the country and servesas an important source of foreign exchange inflow. However, the majority of migrants whowork in Russia and Kazakhstan have neither proper registration nor employment permits,which makes them legally and socially very vulnerable (no legal protection and access tobasic social services). Also, inefficient and costly channels for remittances decrease their economic value,especially in poor and rural areas for which they represent a crucial source of income. The poverty profiling exercise conducted in 2003 indicated that private transfers tended tobe more important among poor households. However (as in the case with pensions), theaverage size of the transfers received by the richest quintile was almost twice higher thanthat of the poorest quintile 52 . Early 2007, the Asian Development Bank (ADB) undertook a regional study on remittancesand poverty which covered Armenia, Kyrgyzstan and Tajikistan. In Kyrgyzstan, about4,200 households were randomly selected throughout the country and in Bishkek city.Results 53 showed that:ooooooAbout 20% of households had at least 1 migrant member. Of these, 72% had just onemigrant (15% of all households) and 20% had 2 migrants. Households with more than1 migrant were mostly found in other urban areas and rural areas, than in the capital.About 79% of the migrants did send back remittances, hence some 16% ofhouseholds received remittances from migrants abroad.Average remittances per household amounted to US$1,400 per year in cash,representing about half of the recipient household’s total income. The equivalentof almost US$300 was sent in-kind.Some 44% of the remittance beneficiaries indicated that the level of remittancesreceived in 2006 was the same as in 2005 and 44% said that it increased. About 32%confirmed an increase in the share of remittances in their total income.Almost 78% of migrants used bank or money transfer office services to send theirremittances. However, the balance of migrants used other transfer channels includingdelivery by the migrants themselves as well as by relatives, friends and other privateindividuals. The amount of funds transferred through these informal channelsrepresented 22% of the total volume of remittances. Households in the poorestquintile were less likely to use banks and money transfer offices (68%).An earlier survey conducted in 2005 54 had found a much lower proportion of migrantsusing banks or money transfer offices (34%) and a larger proportion delivering theremittances directly (61%). The reasons for rapid changes of procedures are not clearand may also be due to different survey procedures.50 Kyrgyzstan Country Report August 2008 – The Economist Intelligence Unit51 Kyrgyzstan at a New Stage of Development – UNDP and Government of the Kyrgyz Republic,Bishkek, 200552 Kyrgyz Republic Poverty Update. Profile of Living Standards in 2003 – World Bank Report No.36602,August 200553 A Study on International Migrants’ Remittances in Central Asia and South Caucasus. Country Reporton Remittances of International Migrants and Poverty in the Kyrgyz Republic – Draft for discussion atthe Country Seminar in Bishkek, November 2007 – S. Ibragimova, T. Burzhubaev, A. Temirov, Centerfor Social and Economic Research (SocEconic), November 2007.54 Study conducted by the “Bishkek Consensus” Institute of Economic Policy, 200526

o The number of male migrants was much larger than female migrants (73% versus27%). In the majority of the cases, migrants were young men from rural areas(70%) or other <strong>secondary</strong> urban areas (21%), aged 16-34 years (66%) and with<strong>secondary</strong> education.o The largest outflow of migrants was observed in Osh (37%) and Jalal-Abad (20%)oblasts. This may be explained by the lack of employment in these oblasts and/orhigher mobility of the population. As a result, 19% of recipients of remittances wereconcentrated in Osh oblast, 15% in Jalal-Abad oblast, 16% in Batken oblasts,compared to 9% in Biskek, 9% in Chui oblasts and no more than 5% in the otheroblasts (Talas, Issyk-Kul, Naryn). In terms of amount of remittances, the largest wasin Osh oblast (39%), followed by Jalal-Abad (19%), Bishkek (16%), Osh city (9%_ andBatken (8%).oOver half of the female migrants abroad were working in wholesale and retail trade,14% in other sectors, 8% in processing industry and 8% in construction. More thanhalf of male migrants (59%) found jobs in the construction sector, and 20% inwholesale and retail trade.o The majority of migrants went to Russia (83%) and most of the rest to Kazakhstan(12%).o About 1 out of 5 remittance senders is not a household member, but the sister/brotherof the household head (or of his/her spouse), or the married daughter/son-in-law ofthe household head.o Some 55% of the migrants had lived abroad for 1 to 4 years, and 31% for less than 1year.o Remittances were generally sent 1 to 2-3 times a year (more than 70% of thesenders) and 18% sent remittances more frequently, 4-5 times a year.oooooThe number of remittance-receiving households was lower in the poorest incomequintiles and higher in the richer quintiles. The poorest households received loweramounts than the richest (from US$490 to US$2,380). Including remittances, theirshare of total incomes was 51% for the poorest quintile and 63% of the richest quintile.However, when remittances were included, the share of remittances in the totalincome of the poorest quintile increased up to 81%, while it represented only 31% ofthe income of the richest quintile. These results indicate that remittances cansignificantly contribute to the transfer of households towards better-off incomequintiles.The majority of beneficiaries used remittances to cover their basic consumptionexpenses (78%), particularly in the first 4 income quintiles. Overall, about 6% of theremittances were used for luxury items, 5% for emergency expenses and 2% for debtrepayment. Investment of remittances in entrepreneurial activities was available onlyto the richest quintile (6% of the total remittances, versus 0 in the first two quintilesand about 2% in the 3 rd and 4 th quintiles).Remittances did not influence the proportion of households engaged in business(about 12% overall) or providing charitable aid to others. As such, they did notcontribute to welfare and development at community level (only at household level).There was no relation between receipt of remittances and share of expenditures onhealth or education. Remittances also did not influence the proportion of householdswith children not attending school (about 8%).Remittances strongly supported the propensity of households to save: 60% ofremittance-receiving households had savings, compared to 38% of non-receivers.Most of the savings were done to respond to future emergencies, but a higherproportion of beneficiaries also used savings for home improvements and for specialevents, compared to non-beneficiaries. In case of need for financial assistance, 81%of remittance receiving households would have asked relatives and friends in thecountry, compared to 92% of non-receiving households. A third of remittancebeneficiaries would have also asked migrants for support, while non-recipients wouldnot have had this opportunity.27

oRemittances contribute significantly to decrease the number of poor people. Ifremittances are excluded from households’ income, the number of poor increases by28 times, and the number of extremely poor by almost 6 times. However, remittancesalso contributed to the inequality of incomes among receiving households. According to the national balance of payments, the volume of remittances increased by15 times between 2002 and 2006. Although difficult to estimate, remittances could amountto 27% of GDP, at more than US$1 billion per annum 55 . Other estimates put remittances atUS$700 million in 2007 56 , representing about 70% of net private transfers. The ADB study conducted in 2007 estimated the total cash remittances inflow at US$253million. This lower value than other estimates may be explained by the fact that it did notinclude remittances related to capital of businesses. However, remittances are reported to have dropped significantly since the beginning of2008. This drop is likely to stem from a slowdown in the construction sector in Kazakhstan,which is one of the main destination for Kyrgyz labourers. However, the picture remainsbrighter in Russia, the other main importer of Kyrgyz labour. There was employment fromthe Sverdlovsk region and the city of Samara, and Moscow authorities have announcedplans to simplify the life of labour migrants in the city. Saudi Arabia is also planning to signagreements with the Kyrgyz Republic (and Tajikistan) on labour migration to the country. While migration can increase household income and contribute to economic growth andpoverty reduction, it can also have important negative socio-economic effects: rising flowsof women migrants means that more children are left in the care of older children or grandparents,often with worse results for the children. However, this does not seem to happenso far in the Kyrgyz Republic. While estimates of the extent of human trafficking are imprecise, Kyrgyzstan is clearly animportant source country for trafficking, mainly emanating from poorer areas.Urban areas and poverty Bishek, the capital, is the largest city, followed by Osh.City Estimated population (2004)Bishkek 804,000Osh 228,000Jalal-Abad 78,000Kara-Kul 63,000Kyrgyz Republic Country Profile – The Economist Intelligence Unit, 2008 Only 33% of the population lives in urban areas, but about half of them resides in the capitalcity. The availability of higher paying jobs in urban areas, especially Bishkek, attractsmigrants who comprise 29% of the urban working-age population. Migrants represent only10% of the working-age population in rural areas. However, unemployment is higher in urban areas, at 13% of the labour force. Povertybelts”, with migrants from rural areas, have appeared around the main cities, particularlyBishkek. Many migrants face difficulty to register as residents (heavy bureaucracy) and thuscannot access benefits and services. There are important differences between smaller and larger cities in terms ofopportunities and living conditions, as well as between poor and rich areas within cities.Urban life is monetized and urban residents – especially those without other assets thanlabour – must generate labour earnings in order to cover consumption expenses. Yet, theurban poor often face difficulties in accessing formal and well-paid employment. Access to55 Quoted in “Regional Market Survey for the Central Asia Region”, WFP, Draft, September 200856 Kyrgyzstan Country Report August 2008 – The Economist Intelligence Unit28

services such as child and elderly care, as well as transportation, becomes more criticalbecause of the dependence on ‘out-of-family’ work. 44% of employment in urban areas is in the services sector, followed by 19% in industryand 8% in construction. The majority (72% of all employed) are employees and 22% areself-employed. About 1 in 3 jobs is in the informal sector, outside the purview of the state’slegal environment. Since 2000, urban poverty has dropped more rapidly than rural poverty, with the exceptionof 2005 when economic growth turned negative. The higher sensitivity of urban povertyrates to growth points to the strong linkages between non-agricultural growth, employmentopportunities, and poverty reduction. Compared to the urban non-poor, the urban poor have higher unemployment rates (18%vs. 10%) and lower employment rates (51% vs. 60%). The poor in Osh, the second largestcity, are worst off of all: less than 40% of the extremely poor of working age are employed. Each urban poor working person has to support on average 3 other persons, compared to anon-poor employed person who has to support 2 other persons. An estimated 60% of the urban poor are in the informal sector and an additional 11% workin farming. Only about 1/4 th of the urban working poor are in the formal sector. On the otherhand, they tend to work a larger number of hours than rural workers. An estimated 17% of all households in the bottom 40% income are relatively far from publictransportation compared to 8% of non-poor households. The poverty situation and dynamics differ between Bishkek and other urban areas. Povertyrates are lower than in other cities (there was a much more rapid reduction in moderatepoverty between 2003 and 2004 than in other urban areas), but the heavy concentration ofpopulation in Bishkek area still implies that 30% of the extreme urban poor and 24% of theurban moderately poor live there. Among urban areas, Bishkek has the most favourable labour market conditions, eventhough it has the largest share of informal sector employment. Better economicopportunities and higher possibilities of employment explain the continuous attraction ofBishkek city and its surrounding areas for migrants from rural and <strong>secondary</strong> urban areas. Asurvey conducted in 2007 on a random sample of 4,200 households 57 showed that incomeswere on average larger in the capital city than in other urban and rural areas, by 25-30%. The economic expansion has benefited more Bishkek and surrounding areas than Osh orJalal-Abad. Many of the <strong>secondary</strong> towns are known to have been company towns whoseeconomic viability was largely driven by one firm – many of which went bust in the earlyyears of the transition. But other centres of business do not seem to have emerged and theKyrgyz Republic suffers from a certain “uni-polar” development – with the capital being theengine of growth for the country. Greater analysis is needed to determine why Bishkek is the main urban growth centre andto what extent such factors as superior infrastructure, proximity to Kazakhstan which is botha destination as well as a transit country to Russia, or business networks unique to Bishkek.Gender labour issues The situation with education of women is stable, with girls accounting for about half ofstudents in primary and <strong>secondary</strong> schools, and over-numbering boys in specialvocational schools and higher educational institutions. Women are less active in the labour market than men, at all ages and in both rural andurban sectors. Poor women have the lowest participation rates and gender gaps are the57 A Study on International Migrants’ Remittances in Central Asia and the Caucasus. Country Report onRemittances of International Migrants and Poverty in the Kyrgyz Republic – Draft for discussion at theCountry Seminar in Bishkek, November 2007 – S. Ibragimova, T. Burzhubaev, A. Temirov, Center forSocial and Economic Research ‘SocEconic’, November 200729

largest among the poor irrespective of their sector of residence. However, theemployment gap between men and women is bigger in urban than in rural areas, andbiggest in the 25-34 years age bracket. The gender gap in urban areas may be explained by the lack of child care and elder careservices. Increased female participation in the labour market as household incomeincreases may reflect increased ability to pay for child and elderly care services. Results 58 from the poverty profiling done in 2003 showed that, for each wealth quintile:o unemployment rates were higher for women than for men, except in the richestquintile;o the gender gap (discrepancy between female and male unemployment rates) waslargest for the 2 nd and middle wealth quintiles. Thus, in general, poor women are the group who had the hardest time finding a job in thelabour market, particularly in urban areas. The breakdown of social safety nets and the erosion of social service provision during thetransition period after the collapse of the former Soviet Union have had important effects onwomen in the labour market. First, they have added significant responsibilities to manywomen in the form of care for children and elderly in the family. Second, social servicessectors have traditionally employed women, thus the contraction of these sectors hasincreased female unemployment. Finally, because women live longer than men, they makeup a larger portion of pensioners, whose benefits have also been affected. Women hold a relatively higher share of employment in low wage sectors. In 2003, womenrepresented about 75% of workers in health care, social and education sectors, 43% inagricultural sector and 46% in trade 59 . Within services, women have a higher representationin trade, hotels and restaurants, and in particular in the education and health sectors,compared to men. In the latter two sectors, they are over-represented in positions withlower wage levels, while men have positions in the relatively well-paying publicadministration. Earnings inequality is highest in the public sector. Though lower human capital endowmentsexplain this difference in earnings in the public sector, in the private sector a large part ofthe earnings gap between male and female workers is unexplained. In rural areas, the most common male-dominated occupation (2/3rds of men) is agriculturalworks; the most common female-dominated occupation (22% of women) is teaching. In urban areas, extraction and building trade jobs account for 23% of all male workers, while22% of women work in personal services (housekeeper, travel attendant etc.) and 18% incraft and related trade jobs. On the other hand, women seemed to have more opportunities to participate in newlyformed community groups (non governmental organizations) than in traditional communityinstitutions. In credit groups for example, it seemed that women members generallypredominate, by design and default 60 .Access to financial services Informal credit sources play a dominant role in rural areas and most borrowings are made tocover current expenditures 61 . Data from 2003 indicated that only 27% of all rural householdswere engaged in some form of borrowing, and credit was overwhelmingly used for shorttermconsumption smoothing rather than investment. About 2/3rds of borrowers took loans58 Kyrgyz Republic Poverty Update. Profile of Living Standards in 2003 – World Bank Report No.36602,August 200559 Kyrgyz Republic: Poverty Reduction Strategy Paper Progress Report – International Monetary FundCountry Report No.04/200, July 200460 The Context for Community Driven Development in Central Asia: Local Institutions and Social Capitalin Kyrgyz Republic, Tajikistan and Uzbekistan – The World Bank, July 200261 Kyrgyz Republic Poverty Assessment. Volume I: Growth, Employment and Poverty – World BankReport No.40864, September 200730

to cover day-to-day expenses, such as purchase of food, goods and medicines. Borrowingfor long-term purposes, such as construction, purchase of house and education expenses,accounted for only 11%. As many as 85% of households borrowed from individuals. Banks and finance companieswere sources of credit for only 2% of rural households, while microfinance institutionsprovided loans for only 6% of those who borrowed. Only 6% of the population has a bank account, and less than 5% has access to credit. Access to credit by medium and small enterprises is even lower. There is nearly no microinsurance62 . High interest rates and collateral requirements are perceived as key constraints by privatefirms. The funding gap is particularly large in agriculture and rural areas, despite rapidlygrowing non-bank financial institutions. These shortages prevent smaller private firms fromcontributing more to the economy. Without access to saving services, the poor are not able to properly save for potentialhardship periods or difficult life events. The availability of private financing is constrained by:o highly unattractive loan conditions;o inadequate supply of financial services;o bias against rural lending;o large number of unbankable small firms. While 64% of the population lives in rural areas, the mountainous geography makes itunprofitable to service low populated isolated areas. Furthermore, collaterals have a lowvalue outside Bishkek, the rural bank Ayul Bank faces a liquidity crisis and credit unionshave also low liquidity. The post-office network provides ideal outlets to serve rural areas in future, with a networkof about 900 offices:o head office in Bishkek;o 7 regional offices, in the oblasts;o 43 district offices, in the rayons;o 878 post-offices in every human settlements in the country. A feasibility study by the World Bank developed an action plan to expand existing financialservices (e.g. remittances, pension and bill payments) of the post, and confirmed the highpotential social benefits of using the Kyrgyz Post to provide access to financial services inthe entire country.Bazaars contribution to economy 63 , 64 Kyrgyz bazaars are not captured by official statistics, but have emerged as a major platformfor re-exports of mainly Chinese manufactures to other Central Asia Region (CAR)countries, as well as platforms for exports of domestically produced products. Re-exportedproducts range from fabrics, footwear and apparel to miscellaneous manufactures. As aresult, bazaars have become a major foreign exchange earner through both re-exports andexports of domestic products. According to the National Statistics Committee, the retail trade turnover in bazaars was4 times larger than that of retail stores in 2005. Shuttle, large bazaar-destined trade, is conducted through a network of bazaars that maybe visualized as consisting of regional ‘hubs’ and local ‘spokes’. The latter also rely onsupplies from bigger ‘hub bazaars’, some of which have an international reach. Anecdotal evidence seems to indicate that the Dordoi bazaar (Bishkek area, in the north)serves as a platform for re-exports destined mainly to Kazakhstan, while the major62 Kyrgyz Republic Access to Financial Services – World Bank, Bishkek, 25-26 June 200863 How Kyrgyzstan has seized Opportunities Offered by Central Asia’s Economic Recovery. Patternsand Modalities – B. Kaminski, World Bank, 24 June 200864 How Kyrgyzstan has seized Opportunities Offered by Central Asia’s Economic Recovery – WorldBank – Government/WB/IMF Workshop, Bishkek, 25-26 June 200831

destination of products purchased in Karasuu (Osh oblast, in the south) is probably nearbyUzbekistan. Russia is also a likely consumer of bazaar goods. Re-exports through the intermediary of bazaars have emerged as one of the major levers ofKyrgyzstan integration into regional markets. Their estimated value increased 8 fold over2003-06 and their share in total exports increased from 29% to 69%. Thus, the value ofestimated re-exports now exceeds the value of exports of goods by a very large margin. Transactions are not anymore always done in cash based on personal contacts. With thegrowing availability of banking services, they will be replaced by anonymous, long-termcontracts relying on an effective legal framework to enforce them. While neither all imports nor all exports are reported should not suggest that these activitiesare illegal and part of a shadow economy. The gaps in customs stem from regulationsallowing for undeclared cross-border trade, the use of simplified declarations (as of January2005) and often small quantities involved. Bazaars’ re-export activities contribute to the country’s economic welfare:o they create employment, both directly and indirectly; for instance, the Dordoi bazaar’sdirect employment accounted in 2007 for around 13% of the total employment in thecity of Bishkek oblast, giving work to around 50,000 people (40,000 involved in tradeactivities, about 6,000 in catering, fast food, foreign exchange stands, handling, hotels,bazaar administration, security etc., and the rest in transportation including a busterminal);o they attract foreign traders and therefore they: (i) are a venue for marketing Kyrgyzproducts to foreigners; and (ii) generate revenue from exports of auxiliary services;o they help develop an array of skills associated with marketing that are easilytransferable to other activities. Bazaars’ success is attributed to a special regime which:o shields traders from fiscal and regulatory burden imposed on other business activities;owners of stalls only pay bazaar fees (around US$100 in Dordoi) which cover their taxobligations and payments for facilities;o allows imports into bazaars enter either duty-free or subject to low tariffs and othercharges;o ensures that re-exporters are not harassed by border controls. However, re-export activities can continue only insofar as governments of neighbouringcountries do not impose strict controls on movement of goods and people. In this sense,bazaars will remain susceptible not only to domestic policy decisions but also to othergovernments’ policies.VII - Social safety nets and support system The social sector including education, health and social systems, is important in theGovernment’s budget and in general shows a rising tendency. In 2006, social sectorexpenditures it made up about half of the public budget 65 . Despite this, the total level ofpublic expenditures per recipient is insufficient and does not permit to maintain the earlierattained scale and quality standards in the education and health sectors. The salaries paidto public educational, health and social institutions are not competitive, resulting in anoutflow of qualified professionals from the sector and undermining its capacity to restore thequality of services in the medium-term. The range of social services remains almost the same as during the Soviet period but theirquality has deteriorated significantly. There is a huge gap between the generous formalentitlements and the limited financial resources available. At present, the average pension65 Public Expenditure Review on Social Sector in the Kyrgyz Republic – UNICEF, 200632

enefit represents only 40% of the minimum consumption basket. Drastic measures arerequired to avoid the collapse of the social sector 66 . The social system is managed by the Ministry of Labour and Social Protection (MoLSP) andincludes old-age pensions, child and disabled allowances, funeral allowances andpayments to ‘vulnerable’ families. The distribution of benefits, according to nationallyestablishedcriteria, is at the discretion of local authorities. According to the MoLSP, more than 50% of the total population are supported by the Statesystem of social protection 67 . Programmes comprise (see at continuation for details):o Unified Monthly Benefit (UMB) – see below;o lump-sum child birth benefit;o benefit to non-working mother until a child is 1.5 year old;o Monthly Social Benefits (MSB) – see below. These programmes provide benefits, price discounting and lump-sum annual payments for:o energy sources and public utilities;o public transportation;o socially-protected prices;o housing subsidies (in Bishkek only);o categorical State cash benefits for medicines, prosthetic appliances and facilities inhealth centres and resorts for special contingent citizens;o old person homes and at-home social services, and homes for children with psychoneurologicalproblems.Type of benefit/beneficiaryAmountOn child birth Lump sum (300% GMCL in 2006)On twin births Lump sum (100% GMCL in 2006)On triplets or more children birth Lump sum (150% GMCL in 2006)Old age (pensioner) worker: men above63 years and women above 58 yearsAverage US$ 31.5/months, corresponding toUS$ 12.7/month + work adjustmentsOld age (pensioner) never worked US$ 20/monthPensionersUS$ 3.7/month pension top-up (discretionary)Disabled pensionVariable allowances and free care and prothesesChild care for working mothersUS$ 20/month for 4 months + 1x minimum wage (US$103)Mothers with many children 225% GMCL/month in 2006Children who lost a bread winner 150% GMCL/month in 2006Children who lost both parents 225% GMCL/month in 2006Funeral allowance ?UMB – Children under 21 years in poor US$ 3.5/month/childfamilies‘Vulnerable’ families (320,000 in 2008,310,000 in 2007)One-off 25 kg wheat flour at 20-40% discount (was 50 kgin 2007)Regional Market Survey for the Central Asia Region, WFP, Draft, September 2008Public Expenditure Review on Social Sector in the Kyrgyz Republic – UNICEF, 2006The Unified Monthly Benefit (UMB) 68 The UMB was introduced by Presidential Decree in January 1995, and represents the mainsafety net and poverty reduction program in Kyrgyz Republic. The program provides cashtransfers to poor families with children with targeting determined both by means-testing(monetary income) and categorical criteria. As of 2008, the number of UMB beneficiaries is about 450,000, receiving an average benefitof US$3.5/beneficiary. Categorical criteria for eligibility of household members for the variable UMB:66 Kyrgyzstan at a New Stage of Development – UNDP and Government of the Kyrgyz Republic,Bishkek, 200567 Public Expenditure Review on Social Sector in the Kyrgyz Republic – UNICEF, 200668 Draft Social Protection Strategy Paper. World Bank Report (May 2008)Program Implementation Matters for Targeting Performance: Evidence and Lessons from Eastern andCentral Europe: Country Study for Kyrgyz Republic -CASE (Kyrgyzstan Center for Social and EconomicResearch) September 20, 200633

ooochildren under 16 years (and pupils still in general educational institutions untilgraduation, however, maximum until the age of 18 years)pupils of primary vocational schools and students of <strong>secondary</strong> and higher vocationaleducational institutions (professional colleges) up to the age of 21 yearspeople with disabilities (children under 16, other disabled persons and elderly withouta pension). Means-testing criteria: only households whose per capita monthly income is less than theGuaranteed Minimum Consumption Level (GMCL) are eligible for the Program. The GMCLis a cash social standard established by the Government in 1998 and adjusted annually onthe basis of the state of economy and budget allocated for social transfers. It was 170 Somsin 2006.o To calculate per capita income, family income is divided by the number of familymembers.o Total household income includes net income by all household members from allsources, cash as well as in-kind. Hence it includes income from, among others:employment, bonuses, patented private commercial activities, leases, income fromassets and deposits, crops (estimated by productivity coefficients that differ by regionsand also reflect the type of land –arable or irrigated), pensions, private transfers,scholarships and inheritance. Income from livestock however is not included andneither are unemployment benefits, the MSB (see below) or single transfers such asfuneral allowances or childbirth benefits. The amount of cash transfers paid out on a monthly basis to each household with eligiblebeneficiaries varies depending on household income (as compared with the GuaranteedMinimum Consumption Level) and household composition. It is calculated as the gapbetween the average monthly per capita income and an income threshold called theGuaranteed Minimum Consumption Level (GMCL):UMB= (GMCL-(Hltot/Nh))*Nelwhere: GMCL= Guaranteed Minimum Consumption LevelHltot= Total household income per monthNh= Number of persons in the householdNel= Number of eligible members of the household Thus the UMB is a variable benefit ensuring all households with eligible householdmembers an income no less than a defined minimum social standard. Monthly transfershave averaged about US$3.5 per beneficiary per month (124 Som in 2007), with amaximum amount of US$5.5. Inclusion into the UMB program begins with an application of the potential beneficiary. Theapplication for UMB is handed to the Department of Social Protection of the residence: inBishkek city it is the corresponding rayon DSP and in other cities and settlements it is city orrayon DSP and in rural areas it is the aiyl okmotu. There is no other way to be included intothe program other than through this application. One of the most important conditions ofissuing the UMB is the existence o f a residence permit. If the citizen is registered in onedistrict (rayon/city), but actually lives in another place of this city or rayon, UMB is issued atthe place of registration. Availability of the residence seal in the passport is one o f themajor requirements for the UMB application Verifying eligibility:o The interview with the applicant is conducted by the specialist of the unit of the Statebenefits in the rayon DSP or the social worker in aiyl okmotu. As a rule, specialists ofrayon (urban) DSP have higher or specialized <strong>secondary</strong> degree, the experience ofwork in the social sphere and they can conduct an interview and explain the reasonsfor the refusal.o The main reason for refusal is that per capita income is higher than the programthreshold (GMLC). The lack of all necessary documents is another reason forpotential refusal. More than 20 different documents are required, which may be verycostly, preventing the poorest families from applying.34

Once UMB is approved, the cash benefit is paid monthly through the post office. It is a lumpsum payment for all eligible beneficiaries in each family. The benefit is assigned for12 months and changes if the circumstances of the family have changed (number ofmembers, income, etc.) or when the Guaranteed Minimum Consumption Level(administrative poverty line) is changed. Targeting accuracy:o Evidence suggests that the UMB program performs well with respect to targetingaccuracy.o Specifically, 75% of all benefits paid out accrued to the poorest two quintiles of thepopulation (which closely approximates the poverty headcount of 43% in 2005). In fact,the UMB outperforms all other social protection programs in Kyrgyzstan in terms of itsability to accurately target the poorest quintiles of the population. Targeting accuracyof the UMB also compares favorably with other countries.o According to a <strong>review</strong> conducted in 2006 69 , the number of UMB beneficiaries in Jalal-Abad and Batken oblasts was rather high considering the extreme poverty in otheroblasts. Coverage:o The distribution of beneficiaries across quintiles also reflects strong targeting. Errorsof exclusion are high, however, reflecting a small overall budget and low overallcoverage (13% of the population).o Specifically, given the existing budget envelope, the program is only able to cover26% of those in the poorest quintile and 24% of those in the second poorest quintile.Stronger outreach (and increased budgets) could help reduce errors of exclusion.o Poor groups most likely to be excluded are:• ethnic minorities (mainly Dungans) who live in closed communities, have limitedknowledge of the official language and do not dispose of land,• poor people who fail to cope with providing all the required documents to justifyeligibility due to change of place of residence, high price of travel back to theplace of registration for collecting documents, delayed issuing of birth certificatesfor children; and• new poor in urban areas who can rely less on informal family and communitynetworks for in-kind food support.Poverty 1 st quintile 2 nd quintile 3 rd quintile 4 th quintile 5 th quintile TotalCoverage 24% 23% 11% 5% 2% 13%Distribution ofbenefits45% 33% 14% 7% 2% 100%UMB as %food6% 4% 3% 2% 1% 4%consumptionUMB as %foodconsumption20% 15% 11% 8% 5% 12%ass. Som 124Kyrghyzstan Household Integrated Survey 2006 – Quoted in “Safety Net Responses to Rising FoodPrices: Policy Options and Potential Fiscal Consequences” – F. Gassmann, B. Gotcheva, K. SzecsiAsbrink, the World Bank, Bishkek 25-26 June 2008 Cost effectiveness:o The UMB is also the most cost-effective social protection program in the KyrgyzRepublic in terms of its costs-per-benefit, where benefits are measured by the %reduction in the poverty gap due to the programme. It has low administrative costs(about 9% of total costs).o Specifically, the UMB only costs Som1.6 to reduce the poverty gap by 1 Som, ascompared with a cost of 7.6 Som for "Other Social Benefits," 6.3 Som for Privileges,3.3 Som for Pensions, and 3.0 Som for the MSB cash transfers.69 Public Expenditure Review on Social Sector in the Kyrgyz Republic – UNICEF, 200635

Nonetheless, the UMB programme remains relatively small and modest in its poverty impactdue to:o Low unit value of the transfer (US$3.5 per month on average, with a maximum ofUS$5.5). This, in turn, is linked to the calculation of a GMCL value only on the basis ofthe State’s ability to allocate budget and other resources to an unchanged number ofbeneficiaries. Actually, the value of the GMCL tends to be also much less than theextreme poverty level and shows that the name of the indicator is misleading.o Low overall coverage (less than 15% of the population).o Low coverage of the poor (27% of those in the poorest 2 quintiles of the population). The World Bank (May 2008) prepared a proposal for additional financing aimed to supportthe scaling up and strengthening of the UMB by:o financing a topping up of unit benefits for 10 months spanning the 2008-09 winter(October 2008-July 2009), by US$1/beneficiary/month on top of the US$3.5/month;o technical assistance, including monitoring and evaluation of UMB. The European Commission is also envisaging to support the UMB and the MSB (seeSection XII).Monthly Social Benefit (MSB) Targets specific categories of the population (disabled, orphans, elderly and mothers withmany children having no right to pension etc.) irrespective of their income.o 59,000 beneficiaries in 2007o average benefit: 515 Som (US$ 14) MSB categories include:o disabled children and handicapped persons from birth;o disabled persons as a result of a common disease;o orphan children (bread-winner’s death);o elderly without a right for pension (have not worked);o mothers with many children having no right for pension. The value of the MSB is established in 6 coefficients (0.75 to 3) related to the value of theGuaranteed Minimum Consumption Level (GMCL), depending on the severity of eachparticular case.Privileges 70 Aim to mitigate negative consequences of the rise in prices for medicines and the increaseof tariffs for electricity and transport. Target vulnerable households to pay for consumed electric power, medicines and transport.Privileges for energy sources are granted to certain categories of citizens in the form ofallowances on tariffs in the amount of 100%, 50%, 40%, 30%, and 25% of the cost of thefollowing items: 150 kW electric power, 300 m 3 natural gas, 6 small cylinders liquefied gas,heat energy for 35 m 2 , hot water for 1 person, 1.5 tons coal and subsidies worth 400 Somfor medicines per beneficiary per year as well as some travel allowances. Cash payments are stipulated for Veterans of the Great Patriotic War on Victory Day.Elderly of some categories may count on a free-of-charge trip about the CIS and Bishkek,as well as free facilities in health centres and resorts. Privileges are granted on the basis of specific categories (income not being taken intoaccount) and on the basis of an income check.o About 227,000 people benefited in 2006, under 32 categories Main privileges’ group categories include:o Veterans of the Great Patriotic Waro international soldiers;o persons awarded for special services;70 Public Expenditure Review on Social Sector in the Kyrgyz Republic – UNICEF, 200636

oooooooovictims of the CAES disasterfamilies living in high mountain areas;pensioners;disabled persons;mothers with many children;needy familiesOfficers and pensioners of law enforcement bodiesfamilies whose bread winner died.Socially protected prices 71 Aim to enable population groups with low income to pay for public utilities (heating, water,gas) at the prices set in December 1999 and for consumed electric power. Compensation is provided for needy families living in places other than Bishkek and havingan income of 350 Som (in 2006) per each family member to pay for:o heating, hot water and gas;o consumed electric power (25 Som compensation) In 2006, according to the MoLSP, only dwellers of Osh, Jalal-Abad and a number of cities inChui oblast were benefiting from compensation for heating, hot water and natural gas.Housing subsidies 72 Provide support to needy dwellers of Bishkek. Beneficiaries are families whose monthly expenses for payment of public utilities (heating,hot water, technical maintenance, removal of refuse, gas) do not exceed 27% of theaggregate family income. The value of the subsidy is calculated within established socialnorms in terms of dwelling area per person (35 m 2 for 1-2 persons, +14 m 2 for 3 or morepersons but not more than 70 m 2 at total). In 2006, it amounted to 140 Som on average,with beneficiaries having an average per capita income of 804 Som/month (which wasbelow the poverty line). As of 2006, about 5,120 families (15,350 persons) received housing subsidies from the localbudget of Bishkek. Main recipients are single pensioners.Old person homes and social services 73 The State maintains 13 old person homes for elderly, lonely and sick people, and for peoplehandicapped from birth. At total, in 2006 about 2,400 elderly and children with psychoneurologicalproblems lived in these homes. About 10,000 lonely elderly with limited capacity to work also receive social services athome.Conclusions on the Government’s social safety net programmes In addition to the low value of the social support provided under the UMB programme(GMCL is even lower than the extreme poverty line), eligibility criteria remain an issue:o The methodology of UMB calculation on the basis of documents certifying the value ofmoney incomes in the context of the Kyrgyz economy, with its large informal sectorand a limited role for commodity-money relations (especially in rural areas), is notlogical. Thus, a significant share of incomes cannot be registered, among themincomes from natural economy or from small retail sales. The availability of livestock,which is an important tangible asset of the rural population, as well as other tangibleand intangible assets, is not taken into account either.o According to a <strong>review</strong> done in 2003 74 , a comparison of UMB beneficiaries and nonbeneficiariesshowed that there were no significant differences in their living standards.About 1/4 th of people in these categories had a per capita income less than GCML.71 Public Expenditure Review on Social Sector in the Kyrgyz Republic – UNICEF, 200672 Public Expenditure Review on Social Sector in the Kyrgyz Republic – UNICEF, 200673 Public Expenditure Review on Social Sector in the Kyrgyz Republic – UNICEF, 200674 Beneficiary Assessment of the Unified Monthly Benefit, Socially Protected Prices, and the System ofHousing Donation Payment – CASE-Kyrgyzstan and the ‘Information Assistance’ PF, Bishkek, 2003 –Quoted in “Public Expenditure Review on Social Sector in the Kyrgyz Republic” – UNICEF, 200637

The main difference between them may have been the inability of non-recipients tofind money and time necessary to draw up documents to apply for the benefits. Disabled persons constitute the largest number of MSB social service beneficiaries. As withUMB, the benefit accounts for 1/4 th of all income of recipients, but both the value of socialservice benefits and total incomes of this category of the population, as well as variation inliving standards, appear to be higher than for UMB beneficiaries. The group of beneficiaries from electric power privileges is less homogeneous. An analysisshowed that privileges for the budget of a recipient family covered 1/3 rd to half of expensesfor electric power, but in the total sum of expenses, the share of privileges was only 2-4%. Privileges for other energy sources (coal etc.) play a more important role in the budget. InBishkek, the share of privileges for energy sources seemed notably higher than in otherparts of the country. Housing subsidies are one of the most targeted public assistance programmes. Theirrecipients are mainly pensioners in Bishkek. The majority of them are so-called “new poor”,i.e. retaining some assets but earning very small incomes. However subsidies appearedhelpful but insufficient. A <strong>review</strong> conducted by UNDP 75 in 2005 recommended:o To improve targeting of social safety net beneficiaries;o To reduce the number of Monthly Social Benefits and replace the variety of nonmonetarybenefits and privileges by direct cash payments;o Instead of using pensions to reward public achievements or compensate for difficultworking and living conditions, higher wages and well-targeted social benefits shouldbe used;o In order to reduce the excessive number of pensioners and increase the level of thepension, to limit the number of pension recipients to those who are truly unfit for work.This would require a change to pension legislation, including increase of theretirement age to 65 years and abolition of pension privileges for various groups. Beneficiaries of the various assistance programmes generally receive their entitlements ona timely manner and in cash. However, overall, the support is low. For example, the supportreceived by an isolated pensioner would not cover the cost of the minimum food basket. There is also a growing debt on the ‘privileges’ component, which stresses the need toimprove targeting. Since 1996, part of the MoLSP expenses is supported by the Food Security Programme ofthe European Commission (grant of 10 million Euro per year). Recommendations to improve the system of social protection include 76 :o Improve targeting performance by <strong>review</strong>ing the methodology to assess a family’saggregate income used to calculate the amount of the UMB. This is especiallyimportant for applicants in rural areas. Better targeting will save funds that can beused to increase the size of the benefit;o Replace different in-kind allowances and privileges with cash benefits;o Enhance the role and responsibility of local governance bodies, especially indisputable cases. The Government already took a number of measures and some donors (e.g. World Bank,European Commission) also intend to support the State’s efforts towards supporting themost vulnerable groups affected by the increased prices of food, electricity and heating (seeSection XI).75 Kyrgyzstan At a New Stage of Development – UNDP, Bishkek, September 200576 Public Expenditure Review on Social Sector in the Kyrgyz Republic – UNICEF, 200638

VIII - Food consumption and food expenditures Kyrgyz families eat 3 meals a day together, as schedules allow 77 .o Breakfast: black tea with sugar, and honey or preserves on buttered bread;o Main meal is usually dinner: hot meal traditionally consisting of meat, rice or noddles,bread and vegetables.o Every meal begins and ends with several cups of tea, usually heavily sweetened.o Common dishes include plov – rice with lamb, carrots, onions, and garlic -, and manty– steamed meat and onions sealed in dough patties.o Potatoes and rice are stapleso There are various breads: dark, long loaf (byolko) and flat (tahngdyr nahn)o Seasonal produce includes tomatoes, cucumbers, carrots, cabbage, apples, grapesand melon. They are preserved for winter months.o Nuts, especially walnuts, are readily available in the south.o The national Kyrgyz dish is beshbarmak, consisting of noddles and meat eaten withthe fingers. It is usually reserved for special occasions Most rural dinners eat from a common plate in the centre of the table. Each person mayhave a small individual plate on which to place food. Combined food consumption <strong>data</strong> from FAO Food Balance Sheet and National StatisticsCommittee <strong>data</strong>, indicate that:o bread, bakery products and potatoes have become the major food items consumed bythe population;o the consumption of meat and meat products, and oil crops (e.g. sunflower) hasdeclined;o milk and vegetables supply has increased; the contribution of vegetables to the dietincreased while milk and dairy products remained stable. The minimum food basket considered for Kyrgyzstan in the Kyrgyz Integrated HouseholdSurvey (KIHS) and World Bank’s poverty report represents 2100 kcal and the consumptionof a relevant, relatively low-income population group:Minimum food basket for Kyrgyzstan Calories per capita per day(2003) Kcal % kcalApproximate quantityTotal 2100 kcal 100% ~ 980 gBread and cereals 1350 kcal 64% ~ 390 gMilk and dairy products 101 kcal 5% ~ 170 gMeat and meat products 56 kcal 3% ~ 22 gFish ~ 0 ~0 ~ 0Cooking oil and fats 240 kcal 11% ~ 27 gEggs 9 kcal 0.4% ~ 13 gPotatoes 95 kcal 4% ~ 120 gVegetables 69 kcal 3% ~ 170 gFruits 15 kcal ~1% ~ 30 gSugar 154 kcal 7% ~ 38 gTea, coffee, beverages 5 kcal ~0 ~ 0Non alcoholic beverages 3 kcal ~0 ~ 0Other food products 1 kcal ~0 ~ 0Adapted from: Kyrgyz Republic Poverty Update. Profile of Living Standards in 2003 – World Bank reportNo.36602, August 2005 Despite the fact that Kyrgyzstan produces enough milk, meat, vegetables and a good partof its wheat requirements at national level, physical and economic access to sufficient foodto meet the nutritional requirements is not guaranteed for all the population. A majority ofhouseholds does not produce sufficient food to meet the dietary requirements of all theirmembers and does not possess enough income to purchase the complement. Food accessis severely constrained by poverty (see Section IX).77 Kyrgyzstan – CultureGrams World Edition 200939

At national level, per capita calorie, protein and fat intake 78 showed a minor decrease in2007 compared to 2006. However, the per capita kilocalorie was lower than the officialrequirements for Kyrgyzstan (2430 kcal/capita/day) and the gap deteriorated for kilocaloriesand proteins between 2006 and 2007:o gap of 210 kcal/cap/day for 2007 compared to 160 kcal/cap/day for 2006;o gap of 21 g of proteins/cap/day for 2007, compared to19 g for 2006;o gap of 16 g of fat/capita/day for both 2006 and 2007.2006 2007Kilocalories/capita/day 2,270 kcal 2,220 kcalProteins g/capita/day 59.9 g (10% kcal) 57.9 g (10% kcal)Fats g/capita/day 57.4 g (23% kcal) 57.5 g (23% kcal)Food Security Information Bulletin No.2/2008 – National Statistics Committee, Bishkek, 2008 The food intake of pensioners was on average larger than the food intake of other activepopulation members. Both intakes decreased between 2006 and 2007. Daily intakes werelower than the official food requirements for active members, as well as for children, with adeterioration observed between 2006 and 2007. The gap between children’s food intake and official food requirements was larger than forother groups of the population, particularly for children belonging to households in thepoorest and 2 nd wealth quintiles. The largest per capita kilocalorie intake was in Chui (2580 kcal) and Batken (2500 kcal)oblasts, while the lowest was in Jalal-Abad (1900 kcal), Osh (2040 kcal) and Narynoblasts (2100 kcal). However, the average food intake showed large variations from oneyear to another.Estimated food intake in 2007Kilocalories/capita/day Proteins g/capita/day Fats g/capita/dayKyrgyzstan 2220 kcal 57.9 g 57.5 gBatken oblast 2500 kcal 62.2 g 70.2 gJalal-Abad oblast 1900 kcal 50.7 g 42.7 gYssyk-Kul oblast 2300 kcal 56.8 g 59.2 gNaryn oblast 2100 kcal 62.6 g 50.7 gOsh oblast 2040 kcal 51.4 g 50.3 gTalas oblast 2380 kcal 61.6 g 60.3 gChui oblast 2580 kcal 67.7 g 71.5 gBishkek city 2340 kcal 63.9 g 68.0 gFood Security Information Bulletin No.2/2008 – National Statistics Committee, Bishkek, 2008 Not surprisingly, the poorer quintiles of the population have a lower per capita foodintake than the richer quintiles 79 . Alarmingly, between 2006 and 2007 the food intake of thepoorer quintiles also deteriorated more than the food intake of the richer quintiles, as shownby the gap between intakes and official requirements. Results indicate that only the 4 th andupper wealth quintiles cover their kilocalorie requirements. In 2003, most of the households in the poorest quintile, 2/3rds in the 2 nd quintile and 58% inthe 3 rd quintile did not meet the recommended daily kilocalorie intake per capita. The lowlevel of kilocalorie intake of the poorest and 2nd quintiles is worrying and indicates seriousrisks to health and well-being of these groups of the population All wealth quintiles decreased their kilocalorie and protein intake between 2006 and2007, though very little for the two wealthiest quintiles. Changes in fat intake were smallexcept for the poorest quintile.78 The per capita food intake is estimated on the basis of a comprehensive food diary maintained for aperiod of two weeks by the households randomly selected in the quarterly Kyrgyz Integrated HouseholdSurvey conducted by the National Statistics Committee.79 See Section IX for the methodology used by the National Statistics Committee to define poverty.Essentially, poverty is defined by the level of consumption expenditures (food and non-food) comparedto a pre-defined poverty line taken as reference.40

Kilocalories/capita/day Proteins g/capita/day Fats g/capita/day2006 2007 2006 2007 2006 2007Kyrgyzstan 2270 kcal 2430 kcal 59.9 g 57.9 g 57.4 g 57.5 g1 st quintile (poorest)gap/requirements1670 kcal-760 kcal1560 kcal--870 kcal42.1 g-36 g39.2 g-39 g38.2 g-35 g34.9 g-38 g2 nd quintilegap/requirements1980 kcal-450 kcal1870 kcal-560 kcal51.2 g-27 g47.8 g-31 g46.4 g-31 g44.0 g-29 g3 rd quintilegap/requirements2210 kcal-220 kcal2170 kcal-260 kcal58.5 g-20 g56.5 g-22 g54.0 g-19 g54.3 g-19 g4 th quintile2440 kcal 2450 kcal 64.6 g 64.0 g 63.2 g 65.0 ggap/requirements + 7 kcal + 21 kcal -14 g -15 g -10 g5 th quintile (richest) 3070 kcal 3040 kcal 83.3 g 82.1 g 85.4 ggap/requirements + 640 kcal + 610 kcal + 5 g + 4 g + 12 gFood Security Information Bulletin No.2/2008 – National Statistics Committee, Bishkek, 2008-8 g89.3 g+ 16 g Food intake was lower in urban areas than in rural areas. In 2003, 73% of the urbanpopulation was getting less than the official kilocalorie recommended intake, compared to53% of the rural population. Reasons for this difference may include:o greater access to household plots in rural areas, hence greater self-sufficiencycapacity;o higher dependence on market purchase in urban areas, with greater difficulties to buyfood especially in a context of rising food prices and more expensive products inurban than rural areas;osmaller share of expenditures dedicated to food in urban areas, due to theimpossibility to reduce certain non-food expenditures (heating, water, housing). These results indicate that food access is lower for the urban population despite lower ratesof poverty overall. The poorest quintile of households spends about 60% on food 80 .Poverty 1 st quintile 2 nd quintile 3 rd quintile 4 th quintile 5 th quintile TotalShare offood in total 60% 55% 52% 50% 43% 52%consumptionSafety Net Responses to Rising Food Prices: Policy Options and Potential Fiscal Consequences – F.Gassmann, B. Gotcheva, K. Szecsi Asbrink, the World Bank, Bishkek 25-26 June 2008 In 2006, 30% of the poor households’ food expenditures were on cereals, compared to 17%of the wealthiest’s food expenditures. Compared to richer quintiles, the poorest quintilededicated a lower share of their food expenditures to milk and meat, but a higher share topotatoes and fats. Kilocalorie intake also seemed lower in urban than in rural areas, despite the fact thatpoverty rates were higher in the latter. This result may be linked to the higher degree of foodself-sufficiency in rural areas, while the urban poor lack the necessary income to purchasesufficient food. The main source of food has moved from food purchases towards food produced for selfconsumption,particularly in rural areas. Although the urban population is much moredependent on food purchases, the share of self-production is nonetheless important (about1/4 th of total food consumption in 2003). Almost half of the households (47%) are net food producers 81 :o 44% of net food producers are poor, versus 35% of net consumers;80 Kyrghyzstan Integrated Household Survey (KIHS) 2006, quoted in “Safety Net Responses to RisingFood Prices: Policy Options and Potential Fiscal Consequences” – F. Gassmann, B. Gotcheva, K.Szecsi Asbrink, the World Bank, Bishkek 25-26 June 200881 Kyrgyz Republic: Impact of Food Price Increases on Poverty – S. Sattar, World Bank, Bishkek 24June 200841

o19% of the population are both poor and net consumers, and will be especially hardhit by food price increases.IX- Health, nutrition, electricity, water and sanitation Despite its low level of income per capita (GNI at US$550 in 2006), the Kyrgyz Republicdoes not have a similar profile to low income countries in terms of its health and educationindicators. Social indicators remain relatively high, possibly due to a combination of the highaverage educational attainment of its population (and its impact on health indicators), thecontinued demand for services which build human capital, and the availability of health andeducation services 82 .Nutrition 83Note: Application of the new WHO growth reference charts (April 2006) would likely result inincreased rates of stunting and wasting. Under-5 and infant mortality rates remain relatively high (44 and 38 for 1000 live birthsrespectively) but are steadily decreasing with time. Mortality rates area higher in <strong>secondary</strong>towns and in Batken and Osh oblasts. However, Kyrgyzstan presents lower than expectedU5MR in relation to its Growth National Income (GNI) (or lower than expected GNI inrelation to its U5MR). The rate of stunting (low height for age) among under-5 children in Kyrgyzstan (13.7%) issimilar to the rate reported by some low income countries in Latin America and East Asia. Itfalls into the low prevalence category according to WHO levels. Stunting is higher at older ages, with an increase from 12-23 months of age. The higherprevalence of stunting at 12-23 months (>15%) shows a severe impairment of linear growthat an age when it may be irreversible. Its causes may be sought in the infrequent practice ofexclusive breastfeeding and the low quality of complementary food and feeding practices.The latter may be associated with a combination of lack of resources and inadequateknowledge and behaviour. Children present higher rates of stunting in rural areas than in urban areas. Children of mothers with lower education (primary school or less) have higher rates ofstunting than those with higher education (university degree). Similarly, children living inhouseholds belonging to the poorest wealth quintile have higher stunting rates than thosein households of the richest quintile. Stunting rates are higher in Batken, Issyk-Kul and Talas oblasts (about 23%) and lowest inJalal-Abad and Chui oblasts and in Bishkek city (about 9%). Undernutrition (low weight for age) still represents a public health problem in Kyrgyzstan(Tajikistan, Turkmenistan and Azerbaijan are the countries with the worst situation, followedby Kyrgyzstan, Uzbekistan, Kazakhstan and probably some regions of Armenia, Georgiaand Turkey). Data from various countries show an association between undernutrition and higher childmortality. Several of them, particularly Kyrgyzstan, would benefit more, in terms of reductionof U5MR, from actions aimed at removing or mitigating the root causes of undernutrition. The control of stunting and underweight is based on a combination of social, economic,health and nutrition interventions (the control of wasting, which is low in Kyrgyzstan, needsa different approach in both prevention and management). With few exceptions, mainlylocal projects limited in time and associated with emergencies, food supplementation topregnant women and/or children under 5 does not seem to be popular in CEE/CIS countries.82 Kyrgyz Republic Poverty Update. Profile of Living Standards in 2003 – World Bank Report No.36602,August 200583 Child Nutrition in Central and Eastern Europe and Commonwealth of Independent States. Report of aSituation Analysis – UNICEF, September 200842

Most reported activities are based on Information-Education-Communication and areintegrated into other maternal and child health programmes. Overweight and obesity, in older children and adults, are a public health problem inCEE/CIS countries. Even though, based on WHO categories, Kyrgyzstan is classified ashaving a low prevalence of overweight (5-9%), the country already faces the double burdenof under- and overnutrition. Overweight and obesity prevention strategies also have to include a mix of social, economic,health and nutrition interventions, to be delivered over a long time. The reported rates of exclusive and continued breastfeeding (respectively 37% and28%) fall short of recommendations (exclusive breastfeeding for 6 months and continuedbreastfeeding, with timely, adequate and safe complementary food, up to 2 years andbeyond. The relatively low rates of exclusive breastfeeding, and the consequent earlyintroduction of other fluids and foods, deprive infants of essential nutrients, with immediateeffects on growth. However, in Kyrgyzstan the trend for exclusive breastfeeding at 0-5 months seems to bepointing upwards. The rate of timely complementary feeding at 6-8 months is 50%, and 15%at 4-5 months. Infants given complementary foods and fluids before 6 months usually getcow milk or formula (sometimes fortified, or not), fruit and vegetables. Fortifiedcomplementary foods are not available. Few get tubers, legumes and meat, fish or eggs;more are given carbohydrate-rich foods (porridge, bread, pasta, biscuits). Data fromKyrgyzstan and some other CEE/CIS countries (Armenia, Moldova, Kazakhstan,Turkmenistan) showed that the percentage of infants given protein-rich foods (meat, fish,eggs, dairy products), increases between 6 and 9 months, to 14-19%. Only in the 2 nd yearof life does the percentage of recipient infants go beyond 50%. Protein-rich foods are givenmore and earlier in urban than in rural areas. Vitamin A deficiency (VAD) is a public health problem in Kyrgyzstan, with almost 20% ofchildren vitamin A deficient. However, the country has some of the better developednational programmes (together with Tajikistan and Uzbekistan) compared to other countrieswhere VAD is a public health problem. Twice yearly the Ministry of Health carries out massdistribution of high-dose vitamin A capsules for children aged 6-59 months, in addition tovitamin A supplements that are distributed to new mothers to boost their levels duringbreastfeeding. About 2/3rds of children below 5 years old benefited from this campaign in2006. Between 40% to 60% of 6-24 month-old children are iron deficient and up to 38% ofwomen suffer from anemia 84 . These levels put Kyrgyzstan in the severe category withregard to anemia. Large scale fortification programmes are difficult because a lot of wheatflour comes from household sources of very small mills. Only 13% of households consumeflour that is fortified with iron. The widespread consumption of tea is also interfering with ironabsorption. Kyrgyzstan falls into the mild iodine deficiency category (median urinary iodineconcentration in school children is between 50-99 mcg/l). Iodine deficiency is moreimportant in some regions. While about 3/4 th of households consume adequately iodizedsalt, urban households are more likely to do so (84%) than rural households (70%). Addressing inequities of nutritional status and targeting specific population groups willrequire:o a focus on ethnic groups, rural poor, lower educated families;o addressing social and economic determinants such as food availability, purchase anduse, strengthening maternal education;o strengthening mothers’ rights in the workplace with adequate maternity leave (legally18 weeks in Kyrgyzstan) and breastfeeding support.84 Damage Assessment Report on Micronutrient Deficiencies – UNICEF, 200443

There is also a need to set up a reliable standard system for <strong>data</strong> collection and use,including:o monitoring and evaluation;o linking outcomes to social and economic determinants.44

SourceResultsUNICEF200468/1,000WorldU5MRDevelopment41/1,000Report2007GNI 2005 US$1870StuntingModerate +severeSevereWastingModerate +severeSevereUnderweightModerate +severeSevereOverweightModerate +severeSevereLow birthweightMulticlusterindicatorSurvey(MICS)2006MICS 2006MICS 2006MICS 2006< 6mths6-11mthsAge groups Zone Maternaleducation12-23mths24-35mths36-47mths48-59mthsWealth quintileRural Urban Low High Poorest 2 nd 3 rd 4 th Richest13.7% 4.9 6.9 15.7 14.7 14.9 16.9 15.7 10.8 21.7 9.7 18.8 14.9 12.5 12.4 10.23.7%3.5%0.4%3.4%0.3%5.8%0MICS 2006 5%Demographicand 6%Health8.3 2.3 6.2 1.6 3.3 1.20.3 1.8 3.3 5.3 3.3 4.06.5 8.4 8.8 3.6 2.9 6.145

Initiation (anybreastfeeding)ExclusivebreastfeedingContinuingbreastfeedingSourceSurvey(DHS)1997ResultsMulticluster89% in first 24 hoursindicator 41% of those 0-3 monthsSurvey 32% of those 0-5 months(MICS)2006 26% of 20-23 monthsVitamin A deficiency (serum retinol)Moderate +severeSevereChildrenreceiving vit.A supplementationIodine deficiencyMICS 200633% < 20 mcg/dl3% < 10 mcg/dl2003 <strong>data</strong> 47% within last 6 months19% prior to last 6 monthsAge groups Zone MaternaleducationWealth quintileMedian urinaryiodineHouseholdswith iodizedsaltMICS 2006Data fromsomeregions99 mcg/lit (i.e. almost at the limit of 100)76% with > 15 ppm21% with 1-14 ppm3% with 0 ppm46

Health Infant mortality: 58 per 1,000 live births (World Bank 2006) / 36 per 1,000 (UNICEF and WorldIndicators Database-WID 2007). Mortality rates are higher in rural areas and among childrenliving in poor households. Life expectancy remains low at 66 years on average. 97% pregnant women receiving prenatal care and 98% births attended by skilled healthstaff (UNICEF 2007). However, the poor quality of health services contributes tocomplications and high neonatal mortality in the poorest rayons. Maternal mortality ratio: 150 per 100,000 live births (WID 2007). Rural pregnant women aremore at risk of dying than women in urban areas. The main cause is likely to be the declinein pregnancy-related health services in rural areas, coupled with increasing costs. About 97% children covered by the National Preventive Immunization Programme and 97%of children aged 12-23 months are immunized against measles 85 (WID 2007). While no new cases of poliomyelitis, tetanus and diphtheria have been reported, there werean increasing number of brucellosis cases in 2003 86 . Tuberculosis (TB) incidence is high (123 per 100,000 persons) and increasing. TBincidence is higher in urban areas than in rural areas. Prevalence of HIV is low 0.1% (females 15-24 years, and all population 15-49 years), butincreasing. HIV/AIDS prevalence is higher in the capital Bishkek and the southern city ofOsh. Awareness of the disease is low, particularly amongst young women in the southernregions. Field inspections carried out under a UNICEF-commissioned study on public expendituresin the social sector 87 showed that rampant poverty was accompanied by worsening nutrition,increased tuberculosis incidence, anaemia and other diseases. Acute Respiratory Infections are the 2 nd most important cause of death of under-5 children(40% of all under-5 deaths). This high mortality rate is an indicator of the low quality ofhealth services, as fatal outcomes can be prevented through timely diagnosis of dangersigns and access to antibiotics. The prevalence of ARI is highest among children living inrural areas and in the southern oblasts (Batken, Osh, Jalal-Abad). Diarrhoea is the leading cause of illness for children under 5, particularly in rural areas andamongst children aged 6-23 months. The free public healthcare system is poorly equipped and the staff is underpaid. Salariesdecreased from 92% of the average in 1994 to 50% in 2004. The official salary for a doctorin 2004 was 1126 Som/month (~US$31), while the average salary in the country at that timewas 2240 Som/month (~US$61). The average cost of a visit to a health institution for a general check-up or health servicescost a patient 140 Som in 2001. Average expenses of a hospital patient were 1300 Som. Inmost of the cases, families provided hospitalized patients with meals, bedding supplies,medicines and various medical materials and services. However, for needy people even asmall shared payment has become a serious obstacle for applying to hospitals. Private hospitals and clinics provide better, but more expensive care. Health infrastructures exist in urban areas but have not been established in peri-urbanareas, especially among the new squatter areas. The Government has implemented a programme of reforms aimed at improving thesituation with regard to financing and health services quality. The introduction of mandatory85 World Development Indicators Database – Millennium Development Goals progress for Kyrgyzstan86 Kyrgyz Republic: Poverty Reduction Strategy Paper Progress Report – International Monetary FundCountry Report No.04/200, July 200487 Public Expenditure Review on Social Sector in the Kyrgyz Republic – UNICEF, 200647

health insurance (in 2006) has enabled an increase in the total budget for health care.However, public funding (central and local) is insufficient and there are many cases ofinformal payments to health care staff as well as out-of-pocket expenses related totreatment. Many people who are unemployed or working in the informal sector are notinsured, particularly women. As of 2003, the mandatory medical insurance covered about80% of the population 88 . Given the lack of budget funds, implementation of a number of health programmes isfinanced with the support of international organizations, such as: the Agency of theJapanese Government JICA and UNICEF for vaccination, UNICEF for the programme onIntegrated Monitoring of Children’s Diseases, and USAID and UNFPA for reproductivehealth activities. Distribution of public health funds between the regions is quite uneven. Geographicallocation is not based on actual need (poverty levels, health care needs, populationdynamics and density) but on the inherited infrastructures (available quantity of facilities).As a result, the largest portions of funds were allocated to those regions that had the mosthealth institutions and personnel. Historically, Bishkek, having the largest grouping of such institutions, relatively progressivetechnologies for treatment, and no shortage of professional personnel, received the greatestamount of funds from the Republican budget. As a result, average per capita expenditurefor health care in Bishkek exceeds the average national level by 60%. At the same time, thisexpenditure is almost 1/3 rd less than the average national level in Jalal-Abad oblast, andhalf the figure for Bishkek.OblastPopulation (2004 est.)% national average per capitahealth expendituresBishkek city 775,300 160%Chui 751,700 114%Osh 1,256,800 81%Jalal-Abad 926,900 71%Batken 406,300 77%Naryn 262,500 115%Talas 209,300 99%Issyk-Kuul 422,000 98%National total 5,010,800 100%Public Expenditure Review on Social Sector in the Kyrgyz Republic – UNICEF, 2006 Almost all medical institutions of the Republican level are located in Bishkek. Bishkekresidents and population of Chui oblast represent 73% of the total number of patients of thenational medical institutions. There are also serious problems with providing rural areas with qualified personnel. Lowsalaries, poverty of the patients, lack of sanitary conveniences and high levels ofresponsibility do not encourage specialists to work in health institutions in remote regionsand rural areas.Water, sanitation, electricity Only 77% of the population had access to improved water sources in 2006 according tothe World Bank 89 , 89% according to World Indicators Database. This value is close to thelevels of Kazakhstan and Uzbekistan and higher than Tajikistan (60%). However, access isbetter in urban area (98% using improved drinking water sources) than in rural areas (66%). About 60% of the population had access to improved sanitation in 2005. This value isquite close to the levels of the other ‘stan’ neighbour countries. Again, access is better inurban areas (75% using adequate sanitation facilities) than in rural areas (51%). A survey88 Kyrgyz Republic: Poverty Reduction Strategy Paper Progress Report – International Monetary FundCountry Report No.04/200, July 200489 World Bank statistics, 200648

conducted by UNICEF in 2006 indicated that only 27% of households in Batken had accessto adequate sanitary facilities, compared to 64% in Bishkek. 90 Electricity is available to all urban and rural residents. Rural access rates to basic municipal services – such as running water, solid wastecollection, and sewage facilities – are low for the poor and non-poor alike due to thedifficulty of providing network services to mountainous and/or low population density areas. In urban areas, the more affluent have much greater access to basic infrastructure servicessuch as a central heating, water supply (including hot), bath/shower, sewerage, central gas,and telephones than the poor. However, even there at least 1/3 rd of the urban non-poor donot have access to at least one basic service. Thus, a much greater proportion of thepopulation suffers from some aspect of deprivation than indicated by the income-basedpoverty line.Access to services, 2005UrbanRuralNon-poor Poor Non-poor PoorLocation of water source:Indoors 66% 29% 11% 3%Outdoors in yard 27% 41% 35% 27%Outdoors in street 7% 30% 54% 70%Access to sewerage network 54% 27% 11% 3%Telephone 61% 28% 23% 12%Kyrgyz Republic Poverty Assessment – September 2007, World Bank (Report No. 40864-KG)X - Education Education is highly valued. Gross primary enrolment: 98% for boys and 97% for girls. 97%of the population is literate. The country is covered with a network of educational institutions in proportion to thepopulation density. There are primary education schools and basic education schools insmall and remote villages, while the majority of schools are general <strong>secondary</strong>. However,due to an insignificant number of newly built schools, more than 80% of village schools and70% of city schools worked in two sessions, and 9% and 19% respectively worked even in3 sessions in 2001 91 . The quality of education has fallen sharply due to under-funding and the resulting outflow ofqualified teachers (from the country and from the sector), and the deterioration of materialsand technical supplies within schools (particularly textbooks and teaching aids). In many rural schools using coal for heating, the heating season begins later and finishesearlier than the officially established time, due to insufficient funding. Characteristic featuresof rural schools are frequent breakages of heating and lighting systems, and roof leaks. Shortage of textbooks and the collection of payment for them resulted in a certaindiscrimination against children from poor families: those who cannot rent textbooks are notsupplied with them free of charge. Children from poor households were more likely not toattend school than those from the richest wealth quintile. Difficulties to pay for schoolexpenses and fees and need for families to diversify their income earning strategies byputting their children in the tobacco and cotton industry also limit these children’s access toeducation. Migrant and street children are also restricted in their ability to access goodeducation. Continuation after the 9-year basic education is lower for rural children, children in lowerwealth quintiles, and children of less educated parents. Continuation rates are particularly90 Multiple Indicator Cluster Survey, Key Findings – UNICEF, 200691 Monitoring and Achievements in the Educational Sphere, Bishkek 2001 – Quoted in “PublicExpenditure Review on Social Sector in the Kyrgyz Republic” – UNICEF, 200649

low in Jalal-Abad, Naryn and Talas oblasts, which are also the oblasts with some of thehighest incidence of poverty. Schools with Russian and Russian-Kyrgyz teaching languages attract more children thanschools with only Kyrgyz language classes. The reasons include: the possibilities tocontinue studies (in Russian) in higher educational institutions of Bishkek; the possibility towork in Russia or Kazakhstan; and access to information resources in the Russianlanguage (radio, TV, Internet etc.). Parents send children to these schools even if located inplaces other than their place of residence. Public transport is used in cities, while in villageschildren have to walk to a neighbouring village or go to a nearby city whereRussian/bilingual teaching is provided. This increases the cost of education. The share of expenditures in education remains rather high in the total expenditures of theState budget (19% in 2004 and almost 4.8% of GDP). However, the total level of publicexpenditure per recipient is insufficient to maintain the earlier attained scale and qualitystandards 92 . The Government issued a regulation on the participation of parents in the maintenance ofmaterial, technical and educational bases of general educational institutions, pre-schoolsand schools, that determines a voluntary procedure for parents’ payments for themaintenance. The Parents’ Board of each educational institution exercises control over theuse of parents’ payments. In actual fact, the Republican budget finances salaries andutilities (water, heating, electricity), while the remainder of school expenses are financedfrom parents’ payments. Parents’ payments are the main source of additional financing inrural areas. In addition, there is non-formal collection of money from parents, to buy chalk, floor cloths,buckets, curtains etc. In 2004, it was estimated that non-formal parents’ payment amountedto 50 Soms/pupil/year in villages and 100 Som/pupil/year in cities. At total, it was estimatedthat total parents’ payment required for proper maintenance of school averaged300 Soms/pupil/year (~25 Soms/month). The share of household’s income dedicated toeducation was estimated at 22% for the two lowest wealth quintiles (40% poorest) while itwas 39% for the highest quintile (20% richest). Local oblast budgets differ between regions. Expenditures per student are higher in Bishkekand Naryn (271 and 238 Som in 2004) and lower in Osh, Batken and Jalal-Abad oblasts(149, 153 and 156 Som respectively). This is due to the fact that: in Bishkek utility expensesare higher (costly heating, hot water supply etc.), there is a higher concentration ofeducation institutions with special status (lyceums etc.), and the wider attraction of specialfunds. Naryn oblast benefits from the high-altitude coefficient. Schools are allowed some income-generating activities. In particular, in rural areas localself-government bodies are obliged (by law) to allocate plots of land to village schools fromthe Re-distribution of Agricultural Land Fund. However:o not all schools have received land;o schools are offered poor quality (non-irrigated, saline or sandy soils) or remote plots ofland;o Principals rent the allocated land to teachers;o income gained from land is low and not in correlation with incomes of otherhouseholds in the same village;o land tax is collected from land rented to schools. Financial support provided by international organizations to the education sector is veryimportant. The Asian Development Bank (ADB) supports a major project since 1997 toincrease the effectiveness of the sector; the World Bank implements projects to supportrural schools, and other donors provide small grants to pre-school and school education. Based on the <strong>review</strong> conducted in 2006 93 , all schools suffer from a shortage of teachers,especially of junior classes and some particular topics (e.g. mathematics etc.). Short-term92 Public Expenditure Review on Social Sector in the Kyrgyz Republic – UNICEF, 200693 Public Expenditure Review on Social Sector in the Kyrgyz Republic – UNICEF, 200650

measures have resulted in an increase workload of working teachers, replacement ofteachers by non-specialists and necessity to invite external students to work as teachers(the latter typically in Talas oblast and, to a less extent, Issyk-Kuul oblast). Dissatisfaction of teachers with wages is high. The average wage rate, assumingworkload by half higher than standard, of a highly qualified teacher was 1380 Som(~US$35) in 2004. Young graduates from higher educational institutions are not motivatedto work at schools due to low wages (400-500 Som/month, ~US$11-14) Teachers’ education grants are allocated based on categories, school class size andteaching load. They are higher in Bishkek (higher qualifications) while in Naryn oblastteachers get additional payment for high-altitude location. The lowest grant distributions (ona per student basis) are in Osh and Issyk-Kuul oblasts. Though wages seem to be paid to teachers without delay and were increased in 2003 and2004, they are searching for possibilities to improve their material situation, including:o migrating out to Kazakh schools, particularly from regions which border Kazakhstan;ooin rural areas, having plots of land, cultivated to the detriment of teaching activity;leaving teaching work in oblast towns and large populated areas in favour ofmarketing. In rural areas, teachers belong to a category of people getting regular labour remuneration.This fact causes negative phenomena connected with the collection of money from teachers.They have to pay taxes and services in cash when receiving salary, while other villagers doit in autumn, after harvesting and mainly in kind. Besides, teachers are forced to pay for anumber of official activities.XI - High food prices, forecasted evolution and responsesHigh food prices macro-economic situation and forecasted evolution At the global level, many commodities reached record prices in nominal terms in 2008.Prices accelerated in 2007. Reasons include:o economic growth in developing and emerging countries, including China and India, astheir growth is more commodity intensive;o gradual reduction of world grain stocks twinned with weather-related productionshortfalls (e.g. in cereals exporting countries Canada and Australia);o rising biofuels production in advanced economies;o depreciation of the US dollar twinned with falling short-term real interest rates andrising credit risk (prices for most food commodities are quoted in US$, and storablecommodities became attractive as alternative assets). Food crop prices are expected to remain high in 2008 and 2009 and then begin to declineas supply and demand respond to high prices. The Kyrgyz Republic short-term outlook has deteriorated significantly in a more uncertainglobal and regional economic environment. As a small and open economy, the Kyrgyzeconomy is adversely affected by a number of external shocks that threaten to have aconsiderable effect on poverty, through the erosion of incomes and a reduction inemployment opportunities. Growth (excluding gold production) is expected to slow to 5% in 2008, mainly due to thespill-over effects from the banking sector difficulties in neighbouring Kazakhstan. Growth in two of the Kyrgyz Republic’s most important economic partners, Kazakhstan andRussia, is expected to slow down in 2008-09 relative to 2007, especially given the impact ofthe global financial turbulence since mid-2007 and the ensuing effect on global growth. The2 countries are important destinations for Kyrgyz non-gold exports, as well as the majorhost countries for Kyrgyz migrant labour. Prices for oil and gas will continue to be high until the end of the year, adversely affectingthe government’s import bill. However, prices for gold, the country’s main export commodity,are also expected to remain historically high (average gold prices are forecast to rise by afurther 29% in 2008, before declining by around 5% in 2009).51

A continuing surge in consumer price inflation in the first half of 2008 led to upwardrevisions of the inflation projection 94 to an average of 22.5% in 2008, before falling in 2009.Real GDP growth is expected to fall to an average of around 6% annually in 2008-09, fromover 8% in 2007. GDP growth accelerated in the 2 nd quarter of 2008 compared to the 1 st quarter, helped bymore rapid growth in agriculture and industrial production. Industrial production is boostedby output at the Kumtor gold mine. External indebtedness and the debt payments burdenhave also eased considerably from 2000 to 2008. The risk of electricity deliveries to industrial enterprises will persist throughout 2008because of low water levels at the country’s main hydropower reservoir (Toktogul).Thiscould lead to a fall in industrial outputs. In June 2008, electricity tariffs rose by 13% (Som 0.7/kwh). Unemployment rates also increased in July 2008 by 1.2% compared to July 2007 95 . The foreign trade deficit continued to widen in the first half of 2008. Exports rose by 22% butwere outpaced by import growth of 50%. A further expected increase in gas import costs in2008-09 will again exert upward pressure on the deficit, as will rapid increases in the cost offood imports. However, this should be mitigated by a slowing of domestic demand forimports (particularly in 2008, as rising inflation curtails spending power), and higher exportsfrom the Kumtor gold mine. The current deficit should additionally be contained by steadily rising net transfers, partlymade up of remittances from Kyrgyz migrant labour abroad. However, inflows ofremittances from Kyrgyz labourers abroad are reported to have declined in the first half of2008. This drop is likely to stem from a slowdown in the construction sector in Kazakhstan,which is one of the main destinations for Kyrgyz labourers. However, the picture remainsbrighter in Russia, the other main importer of Kyrgyz labour. There was employment fromthe Sverdlovsk region and the city of Samara, and Moscow authorities have announcedplans to simplify the life of labour migrants in the city. Saudi Arabia is also planning to signagreements with the Kyrgyz Republic (and Tajikistan) on labour migration to the country. Inflation rose sharply since the summer of 2007 96 . In that year, the increase of food prices inKyrgyzstan was the highest amongst countries of the Central Asia region: 31% compared to27% in Kazakhstan and 23% in Ukraine. Since 2000, energy prices have increased and more recently food prices have increasedmarkedly, especially bread (increased by 63% in 2007), bakery products and rice Consumer price inflation accelerated to 32% year-on-year in June 2008 (compared with5.5% in June 2007), driven by high food prices (mostly) and fuel prices. Growth in privateconsumption and fixed investment will suffer from this sharp rise in inflation.2003 2004 2005 2006 2007ConsumerpriceinflationKyrgyzstan Country Report August 2008 - The Economist Intelligence Unit2008forecast2009forecast3% 4.1% 4.3% 5.6% 10.2% 22.5% 10.0% In June 2008, food prices rose by 5.7% compared with May. Bread and bakery products aswell as vegetable oil increased by 15%, meat 10% and sugar 5%. Petrol and diesel pricesrose by 5% and 8.5% month-on-month, respectively.94 Kyrgyzstan Country Report, August 2008 - The Economist Intelligence Unit95 Food Security Information Bulletin of the Kyrgyz Republic, No.2/2008 – National Statistics Committee,Bishkek, 200896 2008 Inflation Control and Required Measures – National Bank of the Kyrgyz Republic, Bishkek, 25-26 June 200852

2007 20081 st quarter 2 nd quarter 3 rd quarter 4 th quarter 1 st quarter 2 nd quarterConsumerprices(2000 =134 136 141 158 164 175100)% change,year-onyear4.7% 4.8% 9.8% 21.3% 22.3% 28.7%Kyrgyzstan Country Report August 2008 - The Economist Intelligence Unit The sharp increase in Kazakh wheat prices was one of the major factors which triggeredlarge increase in Kyrgyz bread prices in 2007 97 . Dairy foodstuffs increased by 32% in 2007,vegetable oil 49% and fruits 55%. These increases were partially explained by thetransmission mechanisms from the bread prices. Growing regional demand fromKazakhstan, Russia and China also contributed, particularly for dairy products and fruits. In May 2008, the following price increases were reported:Consumer item % increase April to May 2008Sugar + 7.8%Diesel + 7.4%Cereals + 7.2%Meat + 6.6%Construction materials + 6.6%Flour + 6.0%Cooking oil + 5.3%Bread + 4.6%Gasoline + 3.3%Transport + 1.1%Medium-term Policy to Accelerate Economic Growth – A. Japarov, Minister of Economic Developmentand Trade, Workshop “Coping with Short-term Risks and Vulnerabilities and Accelerating Long-termGrowth”, Bishkek, 25 June 2008 In addition to the global food prices pressure, it is likely that speculative behaviour of thetraders contributed to the domestic food inflation. Kyrgyz retail trade of food productsfeatures oligopolistic practices and collusion at certain stages. This is particularly the casefor foodstuff sales which take place at 2 major food markets (bazaars) in Bishkek andKarasuu (in the south). It means that a small group of people, owners and closely affiliatedparties, can control wholesale food prices in the country. Therefore, the prices at thedomestic market could have been increased to a greater extent than the import prices. Energy products saw the second largest increase in prices after the foodstuffs in 2007.Prices of natural gas went up by 22%. Government’s planned increase in electricity tariffsby 10 to 20% in 2008 can only aggravate the situation and accelerate overall inflationfurther. Non-food, non-energy inflation also rose to almost 14% in the spring 2008.97 The Kyrgyz Republic: Short Overview of the Recent Increases in Prices – ECA PREM team –Government/World Bank/IMF Workshop, Bishkek, 25-26 June 200853

Overall producer price inflation was also rapid in June 2008 (at 32%) largely because ofhigh world fuel and food prices.2007 20081 st quarter 2 nd quarter 3 rd quarter 4 th quarter 1 st quarter 2 nd quarterProducerprices(2000 =165 170 178 193 209 223100)% change,year-onyear9.1% 4.9% 12.3% 20.9% 26.8% 31.2%Kyrgyzstan Country Report August 2008 - The Economist Intelligence Unit Farm-gate wheat prices have increased since 2007, in line with international prices. As ofJune 2008, they stood at about US$0.45/kg (~US$22 for 50 kg) for state producers andpeasant farms and about US$0.35/kg (~ US$17 for 50 kg) for households. In addition to the higher input costs experienced in food and oil products, mostmanufacturing sectors are also seeing increasing wage pressures. Overall nominal wagegrowth was 36% year-on-year in June. Excluding the State sector and financial services -which have both seen rapid wage growth for some time – it was particularly high inconstruction (at 150%), mining (at 42%), transport and communications (at 35%) andutilities (at 32%). However, the initial impact of higher food and energy prices will be to reduce growth of realincome/wages, and therefore increase competitiveness vis-à-vis Kazakhstan and Russia. Ifinvestment is maintained and productivity continues to increase, real wages should alsoincrease subsequently. Real wages could be depressed in slowdowns in the Kazakh andRussian economies lead to a reduction in inflows from remittances and transit trade, andreturn of migrants 98 .Micro-economic effects of high food prices: food access The Kyrgyz Integrated Household Survey conducted twice during the first half of 2008 99indicated that nominal cash incomes increased by 27% in 2007 compared to 2006, andreached about 1500 soms/capita/month (~ US$41/month, i.e. less than US$1.4 per day).Real incomes per capita increased by 15% compared to 2006, at 1350 som/capita/month(~US$37/month, i.e. US$1.2 per day). The average nominal wage of an employee in January-June 2008 increased by 35%compared to the same period in 2007, but real increase (deflated by the Consumer PriceIndex) was only about 8%. The average wage in January-June 2008 was valued atUS$137/capita/month (about US$4.6 per day). The largest increases in January-June 2008 compared to January-June 2007, wereobserved in public administration, real estate business, renting and services to consumers,construction and transportation. Labour activities provided 65% of total income while agricultural sales contributed to 19%.o In urban areas, employment provided 79% of the cash income. The 2 nd significantsource of income was pensions, at 8%;o In rural areas, employment provided 54% of the cash income, and sale of agriculturalproducts provided 31% of the income.98 Sustaining the Momentum of Growth in the Context of Global Food and Energy Price Increases –World Bank PREM Team, Joint Government/WB/IMF Workshop on “Coping with Short-term Risks andVulnerabilities and Accelerating Long-term Growth” – Bishkek, 25-26 June 200899 Food Security Information Bulletin of the Kyrgyz Republic, No.2/2008, Bishkek, 200854

Compared to the national average, cash incomes were higher in Chui oblast and Bishkekand to some extent in Yssyk-Kul oblast. Incomes were significantly lower in Talas,Jalalabad and Naryn oblasts. Incomes of the population in Batken and Osh becamenearer to the national average. Some 47% of the population are net food producers. Of these, about 44% are poor, versus35% of net consumers. About 19% of the population are both poor and net consumers,and will be especially hard hit by food price increases 100 . Only 2% of net consumers live each in Naryn and Talas oblasts, while 29% are in Bishkek,27% in Osh and 15% in Chui oblast. 22% of net producers live in Jalal-Abad oblast, 23% inOsh oblast, 15% in Chui oblast and 13% each in Issyk-Kul and Batken oblasts. Because food price increases are accompanied by wage increases, the net impact isuncertain and depends upon employment status and level of wages increases. Projections indicate that extreme poverty (7% of the population in 2007) will increasesharply, by 56% to 84% (between 264,000-398,000 persons), while total poverty couldincrease or decrease by 2-3 percentage points. The extreme poor are being hit the hardest,and urban poverty is expected to increase sharply. As real incomes decline, vulnerability topoverty will also increase.Short-term responses to high food prices The import bill for food and energy products is expected to increase up to 6% of GDP in2008. The rise in oil prices is expected to have a much larger effect on the balance ofpayments than the increase in food prices. However, the rise in food prices is a greaterconcern than the oil price increases for the impact on inflation, household incomes andpoverty. The increase of international commodity price is not expected to be temporary and will haveto be passed on to domestic consumer and producer prices. Full pass-through is expectedto encourage producers to increase supply, and consumer to decrease demand. Thisshould also alleviate balance of payments pressures and shield public finances fromexcessive costs. However, passing international price increase onto consumers can alsoresult in a significant drop in real incomes for households, especially the poor. The policychallenge is therefore to ensure economic efficiency and stability while at the same timeprotecting vulnerable groups 101 . Based on experience worldwide, the best option to address the adverse impact on lowincomehouseholds and other vulnerable groups is through well-targeted direct cash or inkindtransfers. While these are developed or improved, second best measures that can beeffective in the short-term include temporary reduction of taxes and tariffs, and/orintroduction of subsidies on the one or two products that are most vital for the poor.However, these policy responses are likely to result in higher fiscal costs and aredistortionary 102 . The food supply situation has been tense owing to high cereal prices and a ban on exportsof wheat and vegetable oil from Kazakhstan during the final months of the 2007/08marketing year. The ban on wheat exports was lifted in September and according to FAOthe country should not face difficulties in mobilizing its cereal import requirements. Givengood harvests in Russia, Ukraine and Kazakhstan, and expectations for Kyrgyzstan itself,prices for wheat are expected to fall from the high levels of the summer.100 Kyrgyz Republic: Impact of Food Price Increases on Poverty – S. Sattar, World Bank, Bishkek, 24June 2008101 Follow-up Workshop on Macroeconomic Policy and Mitigating Inflation Pressures – JointGovernment/World Bank/IMF Workshop on “Coping with Short-term Risks and Vulnerabilities andAccelerating Long-term Growth” – Bishkek, 26 June 2008102 Macroeconomic Policy Responses to Current External Shocks – R. van Rooden, IMF, Bishkek, 26June 200855

However, faced with the risk of food shortages because of the threat of export restrictionson wheat from Russia and Kazakhstan, the Government intends to purchase 50,000 tons ofwheat from domestic producers to build up the State grain reserves, and will pay Som 17/kg(US$0.47/kg). This price may not offer farmers enough encouragement to enable thegovernment to meet its target. It is an increase of over 50% on the 2007 purchase price(Som 11/kg) but average world wheat prices in the first half of 2008 were over 90% higheryear-on-year. Furthermore, it seems that in late June, private sector food-processors werepaying a farm-gate price of around Som 18-20/kg 103 . High food prices further reduce poor households’ purchasing power. Less food can bepurchased with the same budget, food items may be substituted for inferior products (lowernutritional value), and other expenditures for basic needs may be crowded out (health,education, housing etc.) 104 . As a result, poverty is likely to increase and deepen, nutritionaland health status may suffer, the use of education and health services may decrease, andvulnerable households may have to sell their assets to cope, hence long-term impacts. The most vulnerable groups are likely to be:o net food consumers;o landless households;o households without able-bodied members;o households with fixed incomes;o households with low wages;o households with many children. Measures adopted by the Government include:o release of 4,500 tons of wheat flour from the State Fund of Material Reserve;o subsidized sale of 10 million litres of diesel for spring ploughing at 27% discount tofarmers;o the stock will cover 3 months of consumption of 300,000 families (1.3 million persons);o introduction, in July 2008, of a 100% export tax on wheat, wheat flour, vegetable oiland sunflower seeds, effectively blocking export of home-produced goods and the reexportof imported goods;o decrease of the Value Added Tax (VAT) on producers, importers and sellers of grain,flour and bakery products and vegetable oil;o simplification of customs procedures for small importers of grain or flour (less than20 tons). In addition, other measures have been planned but their implementation is yet to beconfirmed:o instructions to re-establish a strategic State Wheat Reserve;o instructions to establish a 90-day food stock for 8 key commodities;o planned allocation of US$0.8 million for the purchase of fertilizer for further crediting offarmers;o planned release of US$3 million (100 million Som) for easy term loans (7% interest) tofarmers through Aiyl Bank. As a result of the above, the monthly State budget expenditures grew rapidly and the Statesector wage bill increased dramatically in the first quarter of 2008. From a base of 100 in2007, the State budget wages reached a level of 140 in April 2008 The Ministry of Labour and Social Protection already implemented increases as follows:o minimum salary level (currently US$103/month) to 100% of the cost of the minimumfood basket;o pensions up to 43% of the cost of the minimum food basket (400 Som, ~US$11);o insurance amount of pension by 10%;o MBS by 100-300 Som (~US$2.7-8.2).103 Kyrgyzstan Country Report, August 2008 - The Economist Intelligence Unit104 Safety Net Responses to Rising Food Prices: Policy Options and Potential Fiscal Consequences – F.Gassmann, B. Gotcheva, K. Szecsi Asbrink, the World Bank, Bishkek 25-26 June 200856

The Government issued a decree in June 2008 to establish a special account foraccumulation of funds and targeted maintenance of the welfare of vulnerable groups, withthe view to compensate for soaring food prices. The Government also plans to provide all pensioners with monthly compensatory paymentson a sliding scale depending on the amount of the pension, with a maximum top-up of132 Som (~US$3.6) with a pension under 200 Som (~US$5.5), with the view to compensatefor soaring electricity and heating prices. The Kyrgyz Government may consider other responses, including 105 :o Food support programmes (e.g. food stamps, in-kind food transfers, food pricesubsidies): while highly visible, popular and able to cover the whole population, theyare costly regressive (i.e. include non-poor) and difficult to remove;o If the goal is to support income, direct food provision may not be the most efficient dueto higher administrative costs than cash transfers;o If the goal is to increase food consumption, cash transfers is an option, but foodstamps or in-kind rations may be more effective, though more costly than cash. Some measures can be introduced quickly in the context of the Kyrgyz Republic given thatthe existing safety net functions relatively well. Existing benefits can be easily extended atrelatively low administrative costs by:o increasing the transfers under UMB and MSB, although poor households withoutchildren will remain uncovered (for UMB); top up of the UMB current benefit perindividual (by US$1/month) can be sustained because of the low level of the currenttransfer (US$3.5/month);o annual indexation of GMCL, as a safeguard for real benefit value;o extension of eligibility for UMB to all family members; large families would benefitmore (70% of additional benefits would go to the poorest 40%);o expansion of eligibility criteria of UMB to reduce bias to rural poor and/or includeworking age urban poor; options could be to include pensioner households withincome below GMCL or all households with income below GMCL;oimprovement of outreach of existing UMB through proactive social workers and publicinformation campaigns; These measures can be supplemented by targeted nutrition interventions to increase theimpact on certain vulnerable groups (young children, pregnant and lactating women). Consideration could also be given to temporarily (further) reducing taxes, including VATrates and import tariffs on key food items, especially on foods that are relatively important inthe budget of the poor. State reserves of grain can be increased and released during temporary shortages orsudden price increases, in combination with existing targeted programme or food stamps. The World Bank has earmarked US$10 million under its Global Food Crisis ResponseProgramme (including US$4 million for social sectors and US$4 million for agriculture). In May 2008, the World Bank revised a project (“Additional Financing for the Health andSocial Protection Project”) to support the MoLSP in the context of high food prices andunder the Bank’s Global Food Crisis Response window. The project comprises twointerventions:(i) a health component to reduce nutritional vulnerability of at-risk pregnant womenand infants/young children, through the provision of nutritional supplements andnutrition education;(ii) a temporary scale-up of targeted cash transfers under the government’s UnifiedMonthly Benefit programme, during 10 months (October 2008-July 2009);(iii) a third intervention is also being proposed to support activities to enhance longertermfood supply (addressed through “Additional Financing for the AgriculturalInvestment Project”). The World Bank project would support the scaling up and strengthening of the UMB by:105 Safety Net Responses to Rising Food Prices: Policy Options and Potential Fiscal Consequences – F.Gassmann, B. Gotcheva, K. Szecsi Asbrink, the World Bank, Bishkek 25-26 June 200857

oofinancing a topping up of unit benefits for 10 months spanning the 2008-09 winter(October 2008-July 2009), by US$1/beneficiary/month on top of the US$3.5/month;this amount closely corresponds with the 30% loss of purchasing power due to foodprice rises since 2005;technical assistance, including monitoring and evaluation of UMB. The European Commission is considering to take over the World Bank’s assistance up tothe end of 2009. The EC project, for a budget of 5 million Euros, would also increase theMSB by US$1 per beneficiary per month, and include piloting the new criteria for the State’sbenefits’ assignments in several regions. Some of the measures taken by the Government attempt to ease inflationary pressure, butcould take time to filter through lower prices. Also, higher social payments to shieldvulnerable groups from higher prices run the risk of adding to inflationary pressures. Afurther increase in the cost of gas imports in 2008 will exert additional upward pressure onprices. Furthermore, the safety net programme remains relatively small and modest in itspoverty impact due to: (i) low unit value of transfers; (ii) low overall coverage; and (iii) lowcoverage of the poor. Public protests on issues of harsh economic conditions and controversial privatisationscannot be ruled out – and are even probable in the context of spiralling living costs – but thegovernment is likely to be able to contain them 106 . Temporary cuts in the rate of VAT on some food products, introduced in the context ofrapidly rising inflation, may affect government’s revenue targets. The authorities will bereluctant to cut expenditure too aggressively, because of the need to offset the impact ofhigher inflation through wage and pension increases. The main risks currently include:o regional slow-down: particularly in Kazakhstan;o surging inflation: energy and food prices, likely to persist;o current State account deficit and fiscal vulnerabilities increasing;o growth slowdown;o social unrest.XII - Longer-term responses to high food and fuel prices and povertyLonger-term economic perspectives The Kyrgyz Republic – like other Central Asia countries – is confronted to several issues:Main issues Intense socio-economicand political transition Largely rural populationwith subsistenceeconomy Pervasive poverty Increasing socioeconomicstratification Government assistancenot reaching some of thepoor Highly hierarchicalgovernance systemConsequences Radical changes in former way of life Decade-long reforms Almost 2/3 rd of the population in rural areas Livelihoods depend on remnants of collective farm High unemployment – Fragmentation of households Decline in living standards High rural poverty Polarized social networks Linkages between urban and rural networks diminishing Non-poor use interest-based networks to gain access to resources Poor have reduced access to basic services due to shrinking resources Significant deterioration of roads, communication technology, waterquality, water and sanitation systems and heating plants Large part of houses without running water or toilet Soviet collectivization reinforced hierarchical patterns of governance Hierarchical patterns in central and local governing system persist Highly paternalistic notions of management and a sense of passivity106 Kyrgyzstan Country Report August 2008 – The Economist Intelligence Unit58

Main issues Few intermediary ormedium-sizeorganizations exist Lack of linkagesbetween indigenousinformal institutions andgovernment Pervasive corruptionrobs the poor of accessto basic services andeconomic opportunitiesConsequencestowards organizations Economic activity primarily at the State and household level Long-term credit unavailable or difficult to come by due to high interestrates Few registered NGOs due to administrative hurdles in their operations Hierarchical social arrangement in indigenous organizations Personal relationships were principal currency during Soviet period;remain critical for access, although modified Corruption contributing to further inequalities Poor unable to afford bribes to allow access to basic services Poor without networks to voice concern about inequalitiesAdapted from: The Context for Community-Driven Development in Central Asia: Local Institutions andSocial Capital in Kyrgyz Republic, Tajikistan and Uzbekistan. First Phase Report – July 2005 The rise in remittances since the early 2000s was concurrent with –and most likely fuelled –the increase in consumption and merchandise imports. Private consumption grewsubstantially but investment and exports grew little. The main reason why a small share ofthe resources available to the economy went to private investment is because of theunfavourable business climate. Another important aspect of the economic expansion and the growth in private consumptionis that it has not benefited all parts of the country evenly. Bishkek and surrounding areashave benefited more than Osh or Jalal-Abad towns. The capital has become the engine ofgrowth for the country. This serves to exacerbate rural-urban migration and puts unduepressure on the capital’s infrastructure. Without a significant change in the investment climate in the Kyrgyz Republic, the economywill shift towards being less export oriented (with the exception of the export of labour) withtime. The biggest uncertainty lies in the continued demand for Kyrgyz labour by Russia andKazakhstan, itself related to the price of oil 107 . If remittances continue to flow in indefinitely, then the growth in the non-tradeables goodssector and the decline in next exports accompanied by the growing disparity betweenproductivity and real wages are viable for many years to come. Yet, this also exposes thecountry to potentially sharp economic downturns from a decline of remittances, lowerinternal demand for non-tradeables goods and services, higher unemployment ratesexacerbated by the return of workers, and lower revenues to the public sector. Long-term measures to reduce the vulnerability to international food and fuel priceshocks would need to focus on encouraging the expansion of domestic agriculturalproduction and improving energy efficiency 108 . However, absent sufficient infrastructure toincrease cultivation, boost productivity and to bring agricultural products to the market(particularly regional), supply response to higher prices may remain elusive. Compared to neighbouring countries, Kyrgyzstan also presents low labour productivity(output per worker), which erodes its advantage in terms of low wages. On average, in 2005a Russian or Kazakh worker earned a monthly wage 3 times higher than the average wageof a Kyrgyz worker Policies to address these constraints should aim to:o upgrade infrastructure, distribution and storage systems;o increase competition;o provide a stable regulatory environment and access to financing; ando remove remaining trade barriers;o reduce transaction costs;o reform the education sector to support productivity.107 Kyrgyz Republic Poverty Assessment – September 2007, World Bank (Report No. 40864-KG)108 Macroeconomic Policy Responses to Current External Shocks – R. van Rooden, IMF, Bishkek, 26June 200859

Fuel imports could be reduced by moving ahead forcefully with energy sector reforms toattract much needed investment. However, uncertainties on the government’s ability toimplement policy measures taken to encourage foreign direct investment, as well as furtheruncertainties in the important gold sector since 2007 (protracted revision of thegovernment’s joint venture agreement with the leading foreign investor in the sector), meanthat, for the most part only foreign investors familiar with the business environment inCentral Asia – essentially Russian and Kazakh companies – will seek opportunities in theKyrgyz Republic 109 . Given the new conditions of high prices on agricultural products, Kyrgyzstan’s agriculturalengine of growth could drive the economy once again. But unless Kyrgyz farmers canexpand operations and access regional markets, the sector will remain in its <strong>secondary</strong> role– as a social safety net. Poverty may continue to fall in the short-term with greater out-migration and remittanceincome. But the sustainability of future poverty reduction is unclear due to the low level ofinvestment and uncertainty of the stability and growth in remittances. The main areas toconsider in the growth agenda from the poverty perspectives are:1) Encourage the channelling of a greater proportion of remittances to investment and jobcreation, to lead to faster and more sustainable increases in the welfare of the lowincome groups. In particular, poverty reduction based upon growth in the export sectoris much more likely to be sustainable than if it were based primarily on non-tradeablesexpansion.2) Since the majority of the poor live in rural areas and work on farms, a rural anti-povertystrategy would include: (i) improving the rural poor’s access to credit through formalchannels, especially for working capital, (ii) providing technical assistance (extensionand veterinary services) and better access to information for better crop selection, seedquality and output marketing, (iii) increase farmers’ access to machinery or otherproductivity enhancing inputs, and (iv) expansion of the Unified Monthly Benefit to agreater proportion of the rural poor.3) Carry out regional investment climate surveys to understand the differential rates ofeconomic development across the country and identify bottlenecks that are eitherimposed by local governments, uneven national government expenditures, and/ordiffering human and physical capital endowments.4) Reform the education sector, especially linking <strong>secondary</strong> and post-<strong>secondary</strong>education with labour market needs. Provide Vocational and Technical Education.5) Improve the social safety net to increase the coverage of the extreme poor, raise thebenefit level to help the beneficiaries escape extreme poverty, and to decrease theleakage to the non-poor. Through the use of strict selection criteria, leakage to the nonpoorcan be minimized. The increase integration of Kyrgyzstan into the Central Asia region economy is a positivedevelopment. The country has engaged in large re-export activities between China andselected countries of the region, which increased real incomes of large number of peopleinvolved in trade operations. Also, demand by China of Kyrgyz products has increased, andKazakhstan’s interest in tourism, especially in the Issyk-Kul area, has grown as well. With regard to the social assistance programme, options in the medium-term include 110 :o Inside the existing structure: improve targeting to reduce exclusion errors, and expandsocial and other services for poor elderly, children and working-age poor;o Outside existing structure:▪ Child benefits: while nutritional benefits may be high, there will be leakages tonon-poor;▪ Conditional cash transfers: increase the benefit value but tie the receipt to theuse of public services, such as education and health.109 Kyrgyzstan Country Report August 2008 – The Economist Intelligence Unit110 Safety Net Responses to Rising Food Prices. Policy Options and Potential Fiscal Consequences – F.Gassmann, B. Gotcheva, K. Szcesi Asbrink - World Bank, Bishkek, 25-26 June 200860

The Government is considering the introduction of a mandatory private pension pillar fromJanuary 2009 111 . This is in line with the view that the responsibility for ensuring incomesufficient for adequate consumption rests with the individual, with the State’s role beingcontextual and residual. The State would be responsible to ensure that individuals accruepension savings or pension entitlements and, if individuals fail to accumulate the necessarymeans of survival, it should keep the more unfortunate elderly citizens out of poverty. However, the <strong>review</strong> conducted by the World Bank cautioned that the financial sector is notyet prepared for the introduction of funded pension products, and premature introduction ofsuch schemes would mostly benefit the institutions and individuals directly involved inadministrating the scheme. Besides, even if the decision of introducing a mandatory privatepension pillar gets implemented, this measure would fail to address the coverage andadequacy issues of the current pension system. Lack of transparency, low access to finances and poor legislative framework are majorimpediments to the emergence of a vibrant entrepreneurship in the Kyrgyz Republic. In 2008, the Government has prepared a New Economic Policy programme to improveliving standards through economic growth 112 , including:o better financial system;o development of technology and innovations;o improvement of labour force quality;o improvement of health care services quality;o improvement of the efficiency of social security. Accordingly, the programme’s priorities include:1) effective combination of domestic resources and foreign investments;2) maintenance of infrastructure and modernization of the economy;3) training and supply the market by qualified labour force;4) fiscal policy;5) reforms in the social sector; and6) development of regions. Under the NEP, human and social development would be supported through:o establishment of a Social Standards Fund;o better quality education;o easier access to better quality health care services;o provision of social protection;o development of labour market and active measures to support employment;o optimization of migration processes. In May 2008, a ‘one-stop shop’ was introduced into the registration process for newbusinesses, to facilitate the procedures and encourage business. Poor roads (95% ofmovements of goods and people) and interruptions in power supply represent bottlenecksto develop businesses.111 Pension Policy Note. Policy Consideration and Practical Proposals – World Bank, June 2008112 Medium Term Policy to Accelerate Economic Growth – A. Japarov, Minister of EconomicDevelopment and Trade, joint Government/World Bank/IMF Workshop “Coping with Short Term Risksand Vulnerabilities and Accelerating Long Term Growth”, Bishkek, 25 June 200861